During the second phase of financial restructuring in the latter half of 2000, the government and FSC/FSS provided and pursued management normalization plans for eight banks under PCA (Korea Exchange, Chohung, Hanvit, Peace Bank of Korea, Cheju, Kyongnam, Kwangju and Seoul) based on the evaluation results of the ad hoc management evaluation committee. Following a recent evaluation of these banks’ performance since the plans were implemented – excluding Peace Bank, whose banking business was merged into Hanvit Bank in late 2001 – the FSC/FSS concluded 5 of these banks would be removed from PCA.

As part of their normalization plans, 6 of the 8 banks excluding Korea Exchange Bank and Chohung Bank underwent a complete capital reduction. Afterward, they were injected with a second round of public funds in the form of equity participation in December 2000 and capital contributions in September 2001, totaling 7.1 trillion won. As a result of the second phase of restructuring in the banking sector, management performance of these banks such as financial soundness significantly improved through injection of public funds and self-restructuring efforts. A foundation of “clean banks” has been established through clearance of large amounts of ailing assets, and stabilization of financial markets and restoration of the intermediary function of financial companies have contributed to the recovery of the real economy.

The evaluation of the 8 banks’ overall performance as of the end of 2001 by the FSC/FSS included a comprehensive review of these banks’ satisfaction of the basic requirements for removal from PCA such as a minimum BIS capital adequacy ratio of 8% and a grade 3 or higher on the CAMELS evaluation, as well as their management improvements such as advancements in corporate governance and introduction of a risk management system. The FSC/FSS concluded from the evaluation results that 5 banks (Korea Exchange, Chohung, Hanvit, Kyungnam and Kwangju) would be removed from PCA since they satisfied the basic requirements of PCA removal and achieved most of their management improvement targets.

In the cases of Cheju Bank and Seoul Bank, however, the FSC/FSS decided to continue PCA because although they satisfied the basic requirements for PCA removal, a management evaluation revealed the banks fell short of meeting performance ratio guidelines set by the FSC/FSS as well as its own management improvement targets in areas such as ROA. The FSC/FSS will conduct another review of Cheju Bank for PCA removal when it approves the inclusion of the bank into the Shinhan Financial Holding Company scheduled in June 2002. Moreover, Seoul Bank will also undergo another review after December 31, 2002, which marks the end of the implementation period of its management improvement plan.

Banks are expected to benefit from PCA removal by expanding and increasing their business activities made possible by a more conducive business environment, including reduction of overseas financing costs deriving from higher credit ratings. Moreover, assuming enhanced profitability leads to increased bank value, PCA removal may assist in the recovery of public funds injected into these banks.

* Please refer to the attached file for details.