SOUTH KOREAN CRISIS

Role of Banks and Financial Intermediaries

Role of Banks and Financial Intermediaries

Role of banks

The crisis in South Korea had a very negative impact on the economy. The economy went into recession, and capital account liberalization created a foreign exchange crisis, which Korea never encountered before. Basis guidelines that were key indicators failed to provide justifications and reasons for the crisis. Banks and other financial institutions took many decisions that influenced the economy in a negative way. In Korea, commercial banks invested and focused on short term financing such as commercial papers, corporate bills, and cash management.

By investing in various financial markets, they created problems for the economy, private sector and the public sector. The banking sector mostly relied on short term loans and was dependant on the domestic market to finance their foreign debt. The crisis in the foreign exchange market affected negatively every bank in Korea (Thompson, 1999.pp.95)

Due to the crisis in the banking sector, the foreign reserves began to decline. The situation got poor because the banks were not aware of the liberalized environment and had little knowledge about the advanced financial techniques. It can be said that the financial crisis was due to weak banking system of Korea. In Korea, commercial banks did not devise a credit strategy and imposed control over the interest rates to increase their exports. On the other hand, they also never took insolvency in consideration. Keeping in mind the circumstances, it was quite obvious that banking sector was only interested in asset growth rather than its quality. The Korean banking system is that they did have some favourable characteristics as compared to other financial markets (Vegh & Edward, 1997, pp.250)

The poor growth and asset quality were the primary reason behind the economical and financial crisis in South Korea. The first signs of crisis started in the 1996, ...