SOUTH KOREA:

Analyzing its Financial System

from a functional perspective
Ashish Baghel
Sandeep K Biswal

Profile

Area: 100032 sq kms

Population: 50.5 million
GDP: $1.549 trillion (PPP)
Growth rate: 3.62% (real)
Exchange rate: 1107.3 Won per USD
Inflation: 4%
Interest rate: 3.25%
Import: $524.4 billion
Export: $556.5 billion
Forex reserve: $306.4 billion
Market Cap: 107.37 % of GDP (2010)
Unemployment rate: 3.75%

Functions
Six basic or core functions performed by the financial system:
1. To provide ways of clearing and settling payments to facilitate
trade.
2. To provide a mechanism for the pooling of resources and for the
subdividing of shares in various enterprises.
3. To provide ways to transfer economic resources through time,
across borders, and among industries.
4. To provide ways of managing risk.
5. To provide price information to help coordinate decentralized
decision-making in various sectors of the economy.
6. To provide ways of dealing with the incentive problems created
when one party to a transaction has information that the other
party does not or when one party acts as agent for another.

1. Payment System
The payment systems of Korea consist of one large-value
payment system (LVPS) and several retail payment systems
(RPSs). The LVPS is owned and operated by the Bank of
Korea (BOK). Most of the RPSs are owned and operated by
the Korea Financial Telecommunications and Clearings
Institute (KFTC).
LVPS: The BOK began operation of its BOK-Wire+ system in
April 2009, adding a hybrid settlement function to the
existing real-time gross settlement (RTGS) system, BOKWire. This improvement was aimed at reducing
participants liquidity burdens.
RPS: The most prominent are the Electronic Banking
System, the Cheque Clearing System, the Interbank
Remittance System and the ATM Network.

 Securities transactions are matched, confirmed,

cleared and settled mainly by the Korea Exchange
(KRX) and Korea Securities Depository (KSD). The
KRX operates two stock exchanges (the KOSPI and
KOSDAQ Markets) and one futures exchange (the
Derivatives Market), and is also the central
counterparty (CCP) of the securities markets it
operates.
The final settlement of securities occurs no later
than T+2 (ie T+2 for stocks and T or T+1 for
bonds).

Item Name
Cleared (Number)

Unit
Thousand
bills

Cheque Clearing System

2007
2008
2009
799,671.00

740,234.00

2010

641,266.00

2011

512,155.00

413,777.00

Cleared (Value)

Bil.Won

4,360,723.20 5,121,637.70 5,399,803.30 5,811,846.20 5,301,060.90

Daily Av. Clearings

(Value)

Bil.Won

17,674.00

20,644.00

21,251.00

23,062.90

21,289.40

Dishonored (Value)

Bil.Won

4,860.60

7,638.20

7,578.90

8,479.70

5,688.10

Dishonored Ratio
(Number)

0.11

0.15

0.14

0.15

0.11

Bank GIRO System

Item Name
Direct Debits

Unit

2007

2008

2009

2010

2011

Bil.Won

59,363.70

63,026.60

63,681.00

71,797.60

81,750.70

Direct Credit Ttansfers Bil.Won

26,463.70

25,668.50

28,271.40

34,182.60

35,979.10

Item Name
Domestic currency
funds transfer

Unit

BOK Wire System

2007
2008

2009

2010

2011

Bil.Won

34,902,521

40,713,301

42,549,511

47,428,354

48,277,668

Treasury funds transfer Bil.Won

743,987

922,148

904,214

971,582

1,097,360

BOK loans and

discounts settlement

Bil.Won

177,733

162,285

240,598

224,764

185,961

Government and public

Bil.Won
bonds settlement

1,002,369

1,229,036

2,281,717

1,938,377

1,933,775

Foreign currency funds

Mil USD
transfer

61,587

64,590

80,104

71,458

72,768

Item Name
Interbank Funds Transfer
Volume

Unit

Other Payment Systems

2007
2008

2009

2010

2011

Bil.Won

812,205

812,556

803,909

814,498

866,483

Shared CD/ATM Nerwork

Volume

Bil.Won

240,181

243,519

242,531

256,668

274,663

Electronic Banking
Netwok Volume

Bil.Won

6,085,677

7,172,981

8,287,929

9,551,737

11,141,076

EFT/POS system Volume Bil.Won

79

58

45

39

34

CMS system Volume

Bil.Won

101,922

109,952

102,108

107,920

116,540

Bank line Volume

Bil.Won

1,577

1,379

1,143

1,034

1,049

EFT/POS: Elec. Fund Transfer at the point of

sale
CMS: Cash Management Service

LVPS
General Transfer
Call Transaction System
DVP System
PVP System (CLS)
RPS
Check Clearing System
Giro System
Interbank Shared Networks
Electronic Banking System
Interbank Funds Transfer (IFT) System
CD/ATM System
CMS System
Local Banks Shared System
E-Commerce Payment System
EFT/POS System

2007
31,743,648
22,132,416
7,436,741
1,978,558
195,933
11,782,771
4,388,977
146,442
7,247,352
6,085,677
812,205
240,181
101,922
1,577
5,712
79

2008
36,746,621
27,660,333
6,137,462
2,587,378
361,447
13,652,423
5,153,210
153,765
8,345,448
7,172,981
812,556
243,519
109,952
1,379
5,003
57

2009
37,902,037
28,451,278
5,598,200
3,358,958
493,601
15,021,186
5,421,195
157,532
9,442,460
8,287,929
803,909
242,531
102,108
1,143
4,793
45

2010
42,560,254
25,212,380
12,011,686
4,794,734
541,454
16,692,263
5,780,959
174,074
10,737,230
9,551,737
814,498
256,668
107,920
1,034
5,334
39

2011
43,384,494
24,500,629
11,429,303
6,883,761
570,801
17,863,048
5,261,942
195,913
12,405,193
11,141,076
866,483
274,663
116,540
1,049
5,348
34

2. Economies of Pooling
A financial system provides a mechanism for the pooling of
funds to undertake large-scale indivisible enterprise or for
the subdividing of shares in enterprises to facilitate
diversification. In modern economies, the minimum
investment required to run a business is often beyond the
means of an individual or even several individuals.
From the perspective of firms raising capital, the financial
system provides a variety of mechanisms (such as security
markets and financial intermediaries) through which
individual households can pool (or aggregate) their wealth
into larger amounts of capital for use by business firms.
From the perspective of individual savers, the financial
system provides opportunities for households to participate
in large indivisible investments.

Proceeds From Corporate Securities Offerings (Bil Won)

Item Name
Total Number of Corporate
Securities Offerings

2007

2008

2009

2010

2011

1,591

1,629

2,305

2,145

2,036

62,391

57,838

95,824

93,913

114,559

66

42

61

96

67

2,288

717

1,674

4,304

2,439

337

227

316

158

97

Total Value of Public Offerings

New Issues

14,955

4,363

9,942

6,035

10,463

Total Number of Public

Offerings Outstanding Shares

1,188

1,373

1,928

1,891

1,692

Total Value of Public Offerings

Outstanding Shares

45,260

52,759

84,208

83,574

101,658

Total Value of Corporate

Securities Offerings
Total Number of Rights
Offerings of Listed Co.
Total Value of Rights Offerings
of Listed Co.
Total Number of Public
Offerings New Issues

Amounts of Principal Government, Public and Corporate Bonds Issued (Bil Won)
Item Name

2007

2008

2009

2010

2011

Treasury Bonds

48,259

52,054

84,976

77,721

81,306

National Housing
Bonds

8,550

8,473

9,544

8,939

10,002

Industrial Finance
Debentures

27,150

26,519

23,333

9,176

15,025

Corporate Bonds

45,260

52,759

84,208

83,574

101,658

156,690

151,390

375,460

248,150

197,140

553

360

633

612

621

Monetary Stabilization
Bonds
Seoul Metropolitan
Subway Bonds

3. Transfer of resources across time

and space
A well-developed, smooth-functioning financial
system facilitates the efficient life-cycle
allocations of household consumption and the
efficient allocation of physical capital to its most
productive use in the business sector.
Intermediaries that serve this function include
banks and thrifts in financing corporate
investments and housing, insurance companies
and pension funds in financing corporate
investments and paying retirement annuities, and
mutual funds that invest in virtually all sectors.

Surplus-Deficit interaction
Intermediation

Surplus Unit

Deficit Unit

Disintermediation

Composition of Gross National Savings

GNS - GDS
GNS as % of GDP (at current prices)
Item Name

2005

2006

2007

2008

2009

2010

Gross National Saving

31.95

30.75

30.77

30.72

30.31

Corporates

15.24

15.02

15.82

16.92

18.14

Households

6.90

5.72

4.34

4.44

5.36

Government

9.81

10.01

10.61

9.36

6.82

6.78

Gross Domestic Saving

32.34

31.02

30.92

29.99

29.93

32.17

31.88

Sources of credit for households

Household borrowings (% of total)
Item Name

2005

2006

2007

2008

2009

2010

2011

Banks

56.19

57.14

54.66

53.61

52.53

50.95

49.94

Non-Bank Depository
Corporations

16.14

16.03

16.60

17.58

18.12

19.42

20.47

Other Financial
Corporations

22.52

21.63

23.44

23.30

24.01

23.81

23.60

5.15

5.20

5.30

5.51

5.35

5.83

6.00

NBFCs

NBDC:Mutual Savings Banks, Credit Unions, Credit Co-op Societies, etc.

OFC: Insurance, Pension Funds, Public Financial Institutions, etc.

Distribution of household savings by

asset type

Source of Funds
Item Name
Financial Corporations

2007

2008

2009

2010

2011

50.38

57.44

35.58

44.07

47.17

3.49

1.77

12.28

8.55

6.55

Non-financial
Corporations

24.43

55.39

36.04

25.27

27.42

Households

10.14

16.55

14.61

17.59

16.18

Rest of the World

11.57

-31.15

1.48

4.51

2.68

Government

Use of Funds
Item Name
Financial Corporations

2007

2008

2009

2010

2011

51.16

61.31

41.97

47.35

50.53

9.25

9.13

9.96

11.28

10.74

Non-financial
Corporations

14.76

31.36

22.61

13.08

14.92

Households

15.90

30.28

34.40

30.60

28.16

8.93

-32.08

-8.94

-2.31

-4.36

Government

Rest of the World

Debt Instruments: Bank Loans

Total
All Industry
Households

Bank Loans (Bil Won)

2007
2008
803,724
917,110
440,043
528,537
363,681
388,573

Item Name

Delinquency Ratio (%)

2007
2008

Item Name

Item Name

2009
953,505
544,001
409,504

2009

2011
1,063,193
607,336
455,857

2010

All Banks

0.90

1.50

1.00

1.10

Domestic
Commercial Banks

1.00

1.60

1.00

1.10

Specialized Banks

0.70

1.30

0.90

1.10

All Banks

0.60

0.60

0.50

0.60

Loans to Domestic
Households Commercial Banks

0.60

0.60

0.50

0.60

Specialized Banks

0.50

0.60

0.50

0.60

Loans to
Enterprise

Bonds
Item Name

Item Name
Public Bonds

Trades of Bonds (Mil Won)

2007
2008

2009

2010

2011

736,059,736

767,237,317

759,677,009

848,032,362

901,166,796

94,777,209

97,164,972

254,096,969

270,157,986

301,421,488

353,896,562

374,644,644

499,624,016

579,314,864

808,821,272

1,835,715

1,698,912

4,758,339

4,952,255

6,316,784

348,128,045

370,762,261

505,507,493

580,151,542

818,423,643

3,266,885

3,222,349

4,686,720

5,053,876

6,393,360

Listed Amount
Corporate Bonds
Public Bonds
Trading Volume
Corporate Bonds
Public Bonds
Trading Value
Corporate Bonds

Equities
Item Name
Rights Offerings of
Listed Co.
Public Offerings New
Issues

Equities offerings (Bil Won)

2008
2009

2007

Item Name

2010

2011

2,288

717

1,674

4,304

2,439

14,955

4,363

9,942

6,035

10,463

2007

2008

2009

2010

2011

No. of Listed Cos.

745

763

770

777

791

No. of Listed Issues

906

926

925

927

938

28,238,125

29,072,490

31,377,118

33,706,255

35,402,934

951,900,447

576,887,540

887,935,183

1,141,885,458

1,041,999,162

1.40

2.60

1.20

1.10

1.50

No. of Listed Shares ('000)

Total Market Capitalzation (Mil Won)
Weighted Average of Div. Yield

S. Korea: Net capital exporter

BoP (Mil USD)
Item Name

2007

2008

2009

2010

2011

Current Account

21,770

3,198

32,791

29,394

26,505

Capital Account

-23,877

-1,154

-34,651

-27,479

-31,965

2,107

-2,044

1,861

-1,915

5,459

Errors and Omissions

4. Allocation of risk
A well-functioning financial system facilitates the efficient
allocation of risk-bearing. Through often elaborate financial
securities and through private sector and government
intermediaries, the financial system provides risk-pooling
and risk-sharing opportunities for both households and
business firms.
It facilitates efficient life-cycle risk-bearing by households,
and it allows for the separation of the providers of working
capital for real investments (i.e., in personnel, plant, and
equipment) from the providers of risk capital who bear the
financial risk of those investments.
Hedging, diversification and insuring are prominent ways
though which allocation of risk function in performed in a
financial system.

Insurance
Item Name
Total Gross Premium
Density

2005

2006

2007

2008

2009

2010

87928.13 105168.32 119769.29 105897.00 99143.39 120869.29

1747.10

2089.21

2369.82

2076.12

1889.64

2247.84

Penetration

10.71

11.36

11.84

10.84

11.04

11.19

Share of Life Insurance

68.27

66.39

66.28

63.82

62.05

59.57

Share of Foreign companies

18.33

19.15

21.26

22.08

20.14

19.66

Hedging
Item Name
Equity Securities
Debt Securities
Derivatives Total

Securities and Derivatives Transaction (Mil Won)

12/2011
09/2011
06/2011
03/2011
12/2010
114,573,626 86,940,895 48,534,615 168,333,759 120,440,018
7,099,228,443 4,428,440,442 2,158,775,727 7,778,092,972 5,910,803,241
9,346,583,851 7,266,943,927 3,477,276,880 12,518,278,675 9,807,564,825

Futures
Option
Other Exchange-Traded Derivatives
Sum of Exchange-Traded Derivatives
Forward
Option
Swap
Other Over-the-Counter Derivatives
Sum of Over-the Counter Derivatives
Derivatives Relative to Equity
Derivatives Relative to Debt

8,668,572,941 6,723,593,669 3,192,961,277 11,772,651,485 9,225,804,591

181,413,290 138,379,235 69,790,068 197,325,752 166,917,980
0 27,553,784 24,316,279
20,181,860 10,525,853
8,849,986,231 6,889,526,687 3,287,067,623 11,990,159,097 9,403,248,425
119,549,006
165,889,926
210,061,586
1,097,101
496,597,620

92,087,822
117,017,188
167,492,395
819,834
377,417,240

33,905,757
63,506,184
90,964,709
1,832,607
190,209,257

93,318,135
182,061,780
250,469,523
2,270,141
528,119,578

62,442,684
146,086,034
194,394,222
1,393,459
404,316,400

82
1.32

84
1.64

72
1.61

74
1.61

81
1.66

5. Informational role of prices

A financial system provides price information that
helps coordinate decentralized decision-making in
various sectors of the economy. The manifest function
of financial markets is to allow individuals and
businesses to trade financial assets. An additional
latent function of the capital market is to provide
information useful for decision-making.
Interest rates and security prices are information used
by households or their agents in making their
consumption-saving decisions and in choosing the
portfolio allocations of their wealth. These same prices
provide important signals to managers of firms in their
selection of investment projects and financings.

Various Bond Yields

Item Name

2007

2008

2009

2010

2011

Growth rate of GDP

5.10

2.30

0.30

6.20

3.60

Producer price(% change)

1.40

8.60

-0.20

3.80

6.10

Consumer price(%
change)

2.50

4.70

2.80

3.00

4.00

Core inflation(% change)

2.40

4.20

3.60

1.80

3.20

1,712.50

1,529.50

1,429.00

1,765.00

1,983.40

929.20

1,103.40

1,276.40

1,156.00

1,108.00

KOSPI
Exchange Rate per USD

Credit Risk of

2011 1

2011 2

2011 3

2011 4

2012 1

Large Corporations

-3.00

-6.00

-3.00

3.00

6.00

Small and Mediumsized Enterprises

6.00

16.00

9.00

13.00

28.00

General Households

9.00

9.00

3.00

6.00

13.00

6. Managerial incentive and decision

making
A financial system provides ways to deal with the incentive
problems when one party to a financial transaction has
information that the other party does not, or when one
party is an agent for another.
A well-functioning financial system reduces the incentive
problems that make financial contracting difficult and
costly. These problems arise because parties to contracts
cannot easily observe or control one another, and because
contractual enforcement mechanisms are not costless to
invoke.
These contractual frictions take a variety of forms: moral
hazard, adverse selection, and information asymmetries.

Chaebol: Family controlled business

groups
One of the fundamental causes of the Korean financial
crisis of 1997 widespread corporate value destruction
among the Chaebol.
This system pursues growth and market share at the
cost of profitability and shareholder value.
Low cash flow rights (20%) but very high controlling
rights (70%), by way of complex cross holdings among
affiliated firms.
A large disparity between these two rights is a warning
signal. It indicates the strength of the controlling
shareholders incentive to transfer wealth from
minority shareholders.

Chaebol: Too big to fail

Prior to the crisis, only around 27% of the
companies created or maintained shareholders
value.
Amount of bonus depends largely on rank and
seniority rather than performance.
While Samsung owned ChoongAng, The
Federation of Korean Industries, a strong lobby
group for Chaebol owned Korean Economic Daily,
two most widely circulated news dailies.

Turnaround factors
One major contributor to improved
governance has been the lowering of barriers
to foreign ownership in Korean companies.
13% in 1996 to 37% in 2006.
In addition to growing pressure for better
governance from foreign investors, grassroot
reform movements headed by newly formed
NGOs have sprung up.

Cross Country Comparison (2010)

Exchange Rate
Unemployment GDP Growth
Discount Rate (per USD) Savings Ratio
Rate
Rate

Item Name
BoP (Mil USD)

CPI

Korea

29,394

101.00

1.20

1,134.80

32.00

3.70

6.20

U.S.A

-470,902

219.20

0.50

1.00

12.50

9.60

3.00

Japan

195,755

99.60

0.30

81.40

5.10

4.40

China

305,400

104.60

1.80

6.60

4.10

10.40

United Kingdom*

-75,229

116.80

0.50

1.60

7.80

2.10

E.M.U

-55,960

114.30

1.00

0.70

10.10

1.80

Germany

187,943

109.60

1.20

0.70

23.10

7.10

3.70

Taiwan

39,872

105.90

0.50

30.40

31.60

5.20

10.70

11.90

Thank You
Sources:

ECOS Economic Statistics System

KOSIS Korea Statistical Information System
FSIS Financial Statistics Information System
Statextracts Organization for Economic Co-operation and Development
SDBS Statistical Database System Asian Development Bank