Based on the resolution passed by the Financial Supervisory Commission (“FSC”) on June 25, 1999, the Government has determined Korea First Bank (“KFB”) to be insolvent in accordance with Section 2(3) of the Act Concerning the Structural Improvement of the Financial Industry. From this decision, the Government has also issued an order for capital reduction and made a request for fund support to the Korea Deposit Insurance Corporation (“KDIC”).

Following the difficulties in management KFB experienced in its credit relations with Hanbo and Kia during 1997, the Government decided to provide support with public funds in January 1998. However, with the corporate and financial sector restructuring on their way, KFB’s financial conditions further deteriorated by the increases in non-performing loans (NPLs), which resulted from the strengthened asset classification standards, corporate bankruptcies, and the losses incurred from resolving NPLs.

Furthermore, with binding constraints on its making loans and securities investment, KFB is currently unable to carry out its normal operation without any recapitalization support from outside.

There are a number of considerations for the forthcoming injection of public funds into KFB for its management rehabilitation prior to its sale. In the absence of any provision for its management rehabilitation, KFB is certain to face difficulties in retaining its customers, including its corporate clients, and maintaining its operational basis.

Further, since a delay in rehabilitating its management could entail a more significant amount of public funds, a prompt action had to be taken. In addition, management rehabilitation of KFB is a measure which would have had to be taken to resolve its bad assets, notwithstanding its sale overseas. Thus, it is timely and appropriate as a measure to prevent any further deterioration of its financial conditions and facilitate the negotiation of its sale. In order to maximize the valuation of KFB and recover the funds injected, it is an inevitable measure.

Following the precedents of Hanvit and Cho Hung banks, the size of public fund in support of KFB’s management rehabilitation allows for the Government to purchase non-performing loans and for KFB to improve its BIS capital adequacy ratio to the 10% level. The Government intends to give additional support in the event any need to do so should arise according to the terms and conditions of the future sales overseas or the strengthened asset classification standards.

The Government issued an order for paid-in capital reduction as an inevitable measure in compliance with the principles of loss sharing by shareholders prior to giving a public fund support.

The Government shares are to be consolidated, as the net asset value of KFB will be up-leveled to that of paid-in capital by the injection of public funds. In this scheme, the consolidation must not make the price of government shares exceed the purchasing price at demand of minority shareholders. Also, minority shareholders are to receive full write-downs on their capital and obtain appraisal rights. This in effect would preserve the equality among shareholders.

With the forthcoming public fund support, Korea First Bank will be able to improve its capital adequacy and asset quality. The Government will continue to proceed with its overseas sales in order to enhance the financial services by adopting advanced financial techniques and improving competitiveness. This will satisfy the terms and conditions of the agreements with the IMF and the IBRD.

Moreover, it is critical to improving international confidence in the financial reform in Korea. In particular, audience both home and abroad also considering the sale as a testament of the Government’s willingness to reform the financial sector. For this reason, the FSC will continue to make efforts for the sale of KFB in partnership with Newbridge.

* Please refer to the attached file for details.