Mr. Chairman,

Distinguished Guests,

Ladies and Gentlemen:

It is my honor and pleasure to have this opportunity to share my thoughts on what Korea has accomplished since the crisis and remaining tasks for reforming our economy.

About a year has passed since the crisis broke out in Korea, but the situation in Korea is already quite different. Usable foreign reserves have significantly increased to over 45 billion dollars and the composition of foreign debts has improved as well.

Recently, the international community including IMF and the World Bank, praised impressive progress that Korea has made and foreign investors are coming back.

Although I fully understand that there remains a lot more work to be done, let me very cautiously mention three major points which led such a remarkable progress.

First, the reform has been driven by new leadership which is free from previous misconduct. The newly elected president Kim Dae Jung pledged full commitment to the market principle and made series of crucial decisions on how to react, what to do and what to not do.

The newly organized Financial Supervisory Commission, headed by reform minded persons who are well equipped with theories and practices of both financial and corporate sectors but nothing to do with previous misbehavior, took charge of the whole process.

Second, the restructuring program has been based upon internationally well recognized criteria and procedures. The problem faced and still facing is not cyclical but structural.

Hence, we strictly excluded case by case approach but pursue full-scale fundamental reform.

Moreover, we targeted the core of the problem first. For example, resolution of ailing banks was our top priority.

Another example of sticking to the principle is the confirmation of the government not to handover Seoul and Korea First Bank to domestic chaebols, although it may restrict the eligibility for potential bidders and make the sale process more difficult.

Finally and most importantly, the national consensus for the imperative of reform has been the ultimate element of successful implementation, and has been the most powerful engine in overcoming various resistance to reform. In retrospect, I can never emphasize the importance of the national consensus too much.

〈Objectives and principles of financial restructuring〉

To review details of restructuring, let me start with the objectives and principles.

Obviously, the primary objective of financial reform was to restore market confidence in the financial system. Considering the magnitude of problem and potential bank runs, the Korean government has mobilized sizable amount of public resources.

However, fiscal support is provided to viable institutions only as a way to expedite their rehabilitation, conditional upon the institutions' comprehensive self-rescue efforts and accountable loss-sharing to prevent moral hazard.

To eliminate redundancy in staff, branches and banks themselves, the government has facilitated bank consolidation through providing government’ s assistance in favor of merging banks.

After kicking out worst performers, the government has encouraged potential long-term winners to develop into backbone banks in the newly-structured Korean financial system.

The ultimate success of economic reform depends on the speed and scope of corporate restructuring and so it should be pursued in tandem with financial restructuring.

The NPL burden at financial institutions will not be lessened and sound management cannot be secured without restructuring the corporate sector.

Therefore, non-viable corporates that are not able to make profits even under normal financial conditions are to be exited. On the other hand, viable corporates will receive various support measures based upon accountable loss sharing.

The capital market, including foreign direct investment, has been dramatically liberalized. Corporate M&As and real estate acquisitions are also widely open to foreigners.

〈Process of financial restructuring〉

Now I would like to give you an overview of what we have accomplished in financial restructuring.

As you may well know, five severely undercapitalized banks were resolved last June through P&A arrangements. The closure of insolvent banks made a historic moment, because, in the past, banks were never shut down in Korea. This is an evidence that market discipline is being rebuilt within the financial sector.

On the other hand, 7 troubled banks that received conditional approvals, are now taking steps to execute corrective actions.

More specifically, Commercial Bank of Korea and Hanil Bank announced plans to consolidate their operations last August. The newly merged bank will play a leading role in the Korean financial market.

Additional mergers followed, one between Hana and Boram Bank, and the other between Kookmin and Korea Long-Term Credit Bank and this trend of clustering is likely to continue.

On the other hand, Korea Exchange Bank (KEB) will recapitalize through added contributions by major shareholders, namely the Bank of Korea and the German Commerzbank. Commerzbank's intention to inject capital into KEB displays increased confidence toward the future of the bank as well as the overall Korean economy.

If any of 13 remaining banks are found to be deteriorating, they will be subject to corrective actions. FSC has already implemented " recommendation for management improvement " to four banks in this category.

Successful privatization of Seoul Bank and Korea First Bank is crucial because it will bring back market confidence as well as fresh capital to the banking sector.

The government is fully aware of potential buyers' concern on downside risks. Therefore, feasible asset protection schemes will be provided to make these banks more attractive.

It is not only the banking sector that has experienced drastic changes. We have also undertaken substantial measures in the non-bank financial sector as well.

To date, 16 merchant banks, 2 investment trust companies, 4 life insurance companies, 6 securities companies and many saving & loans institutions have been either closed or suspended.

Just like the banks, non-banking financial institutions will also undergo diagnostic reviews of asset and liability soundness whenever necessary, and will be restructured in accordance to majority shareholders' initiative.

〈Government support〉

To support rehabilitation efforts undertaken by financial institutions, the Government continues to provide fiscal resources allocated from an outlay of 64 trillion won.

KAMCO, Korea Asset Management Company, is purchasing non-performing assets from financial institutions to make them clean, and KDIC, Korea Deposit insurance corporation supports for recapitalization and loss compensation.

The Government support has been exercised only under the strict condition that banks pledge drastic loss-sharing and self-restructuring efforts. Their implementation will be, of course, closely monitored by the FSC. Through such restructuring of banks, we have already seen employees reduction of more than 20% and closure of 700 branches.

I am aware that there are still many concerns on the possible deterioration of bank asset quality as the corporate sector remains to be under financial hardship.

However, to my understanding, the market perception tends to exaggerate the magnitude of the problem. At any case, further deterioration of bank loans will be counteracted, if necessary.

〈Future task of bank reform>

Meanwhile, as a way to ensure soundness and competitiveness of banks, FSC distributed strategic templates to all banks.

This template can be used as a software, providing banks an opportunity to internally assess the real situation up front and help them develop comprehensive business strategies, incorporating international best practice.

The terms of reference (TOR) given to merged banks as conditions for government support are designed to improve management measures, which will bring productivity and earning potential of the merged bank up to that of advanced countries'.

The TOR contains near-term profits improvement, disposition of bad assets, M&A integration and post-merger management, recapitalization plan, improvement of corporate governance, risk management, information technology, organizational structure, and financial projection in which ROA needs to exceed 1% and ROE to exceed 15%.

Recently, the merged banks submitted their proposal for the TOR. After browsing it, I found that it contains tremendous improvement and it will be a insightful road map toward internationally competitive bank.

〈Enhancing prudential regulation and supervision〉

It is important to pursue the restructuring in compliance to international standards and best practices. Institutional settings, including prudential regulation and accounting rules, have to be strengthened by fully incorporating global standards.

Whatever the ultimate causes are, there is no denying that the magnitude of current crisis was amplified by capacity-driven policy, loose market discipline and lack of transparency.

Major changes in institutional settings continues to take place since the beginning of this year, with the aim to introduce a new paradigm of economic activities.

First, loan classification and provisioning requirements have been strengthened. For example, previously, loans past due over 6 months were classified as substandard. However, now, loans past due over 3 months are classified as substandard. Moreover, effective as of next year, we will introduce forward looking criteria.

In addition, we upgraded mark-to-market accounting, auditing, and disclosure systems to enhance transparency up to the global best practice.

We will also issue prompt corrective action notices mendatorily. Previously regulators 'can or may' take regulatory actions to financial institutions when their BIS ratios fall below certain requirements.

However, from now on, regulators 'should or must' execute the action as a mechanical procedure without exception. This implies that the financial restructuring process will continue automatically based on clear and transparent principle.

〈Corporate restructuring〉

Ladies and Gentleman, let me now turn to corporate restructuring.

According to the agreement made between President-elect Kim Dae-Jung at that time and Chaebol owners earlier this year, we plan to complete major steps needed for corporate restructuring by the end of this year.

The objectives of corporate restructuring is to improve cash-flow and profitability of corporates in the short-term, and in the longer term to enhance transparency and independence of management. Collectively, this will result in global competitiveness of Korean industries.

To accomplish these objectives, FSC takes its role in overseeing the corporate restructuring process, which is to be driven by creditor banks. The workout process is a major tool for restructuring viable corporates. In this regard foreign advisory groups were hired, utilizing IBRD technical assistance loan (TAL).

Non-viable corporates will be exited from the market promptly. During the restructuring process, diverse capital sources are to be used and losses will be shared between creditors and corporates through voluntary negotiations.
　
The corporate restructuring model in Korea is to take after the London Approach, characterized as being somewhere between the centralized approach used in Sweden and the decentralized approach used in the U.S. In London Approach the Bank of England did a role as peacemaker. In our case, the Corporate Restructuring Coordination Committee, which in effect is an arbitration committee, plays the role of the Bank of England.

Each creditor bank has already established Corporate Workout Units and 210 financial institutions have signed agreement.

Currently 62 corporations out of top 64 Chaebols and additional 10 corporations are under workout process. 15 corporations have already come up with reasonable workout schemes.
　
Through these process, financial institutions are learning a lot about corporate workout and most importantly, they are beginning to think in a commercial perspective. They will speed up the process as their experience accumulates.

I am very proud that Korean banks started to lead corporate restructuring by fulfilling their role as creditors. I'd like to emphasize that this development itself is real restructuring, enabling Korea to maintain a competitive edge in the international market.

〈Top 5 chaebol Restructuring〉

I also feel very relieved by the significant developments made very recently in the top 5 chaebol restructuring.

The government and top 5 chaebol owners have reached an agreement on eliminating cross guarantees between different sub-groups within each chaebol by the end of this year.

Then the same policy framework will be applied for the resolution of companies within each sub-group. Following these process, the capital structure of corporates with core competence will be improved through workout.

The asset swaps and merging in 7 industries, generally known as the "big deals" are now in the final stage of completion.

Government support to the 5 biggest Chaebols in the context of business swaps will be given on an equal basis to that of other corporates under restructuring and the support will be available only after strong self-rescue efforts are demonstrated by Chaebols.

〈Small and medium sized enterprises〉

Since SMEs are the major sufferers of the credit crunch, the Government will provide intensive care for financially distressed, but solvent SMEs to help them turn-around.

“ Triage approach” has been completed recently by creditor banks to categorize SMEs into three classes that are ‘ first priority for support’ , ‘ conditional support’ ’ and ‘ others’ . Among the 23, 285 corporates whose borrowings exceed 1 billion won, first priority is 40%, conditional support 56% and others 5%.

Creditor banks set up plans to support a total of 26 trillion won which is 95% of the proposed loan request by the first priority and conditional support corporates. Financial distress of the SMEs will be relieved pretty soon.

〈Closing Remarks〉

Let me conclude with the future prospects of our economy.

We have just passed through the first round of restructuring by mopping up and chiseling away bulky problems. Nevertheless, there are still lots of work to do. Among other things, it remains our utmost task to transform the management to secure soundness and competitiveness.

Thanks to the successful stabilization of the exchange market, we have already witnessed lowered interest rates, which will reduce financial costs and increase domestic demand.

The bankruptcy ratio already came down to the pre-crisis level. The macroeconomic policy coordination at the global level towards sustainable world growth is also highly welcomed.

The improved macroeconomic and external situation along with ongoing restructuring process will help mitigate the severe credit crunch and economic contraction.

We expect that the economy will hit bottom around the end of this year and will return to positive growth next year.

The reform process that has been pursued is irreversible.

The international standards of market principles have already been installed in all sectors of our economy.

You can be assured that Korea will continue to differentiate itself from other crisis-hit countries through comprehensive reform.

By turning the crisis into an opportunity, Korea will be reborn as a reliable counterpart in the international community once again.

THANK YOU VERY MUCH.

* Please refer to the attached file for details.