The financial system in Korea after the 1997 financial crisis

Since the late 1997, when the Korean government requested a bailout loan from the International Monetary Fund (IMF), there have been considerable changes in Korea. ¹ The crisis began as a balance-of-payments problem flowing from a shortage in foreign currency reserves in the late 1997. The immediate causes of this crisis were the trade deterioration in 1995 and 1996, a series of insolvencies of major chaebols, ² and the subsequent erosion of market confidence in international financial markets. International market sentiment, already shocked by events in Southeast Asia, was aggravated by inappropriate policy responses, by the Korean government, to the evolving problems. However, the long-term source can be traced back to the structural weaknesses of the Korean economy. In legal terms, these structural weaknesses can be explained as the failure of the legal system to adjust itself to rapidly changing economic circumstances. ³ These challenges required Korea to initiate major reforms in all areas of the economy. This chapter explores the legal dimensions of the crisis and the legal changes implemented to deal with it. There are four sections. Section 10.2 considers the sources of the crisis, which are directly related to the financial sector. In Section 10.3, the setup of the financial institutions and financial regulatory system is reviewed. In Section 10.4, the major features of the legal changes to deal with the crisis are examined. The main areas include market integration, financial sector restructuring, and financial regulation. In Section 10.5 some conclusions are given.