Korea: Blanket Guarantee, 1997

Abstract

Korea entered the Asian Financial Crisis in August 1997 with highly leveraged firms and a banking system inexperienced in managing systemic risk. Korea faced a currency crisis and a banking crisis, as foreign banks froze credit to Korean commercial banks and merchant banks. On August 25, 1997, the Ministry of Economy and Finance (MOEF) announced that it would guarantee all Korean financial institutions’ foreign debt—both existing debt and new borrowings. Nonetheless, foreign lenders continued to withdraw credit from Korean financial institutions. On November 19, 1997, a newly appointed MOEF minister announced a suite of measures to promote foreign creditors’ confidence and bring US dollars back to Korean financial markets. Additionally, to facilitate the closure or mergers of troubled commercial banks and merchant banks, the minister said that the Korea Deposit Insurance Corporation (KDIC) would fully guarantee all deposits (principal and interest) of financial institutions until December 31, 2000. On November 27, 1997, the MOEF said that the government also would guarantee collateralized commercial paper to ease pressure on troubled merchant banks; it lifted this guarantee the following October. The blanket deposit guarantee reverted to a limited deposit insurance scheme as scheduled on January 1, 2001, covering up to 50 million Korean Republic won (KRW; USD 40,000) per depositor. The KDIC continued to guarantee 100% of non-interest-bearing settlement deposits until December 31, 2003. The Korean government ultimately guaranteed USD 22.1 billion in foreign debt, and all foreign liabilities were completely repaid by the end of the program on April 9, 2001. Through end-2000, the blanket deposit guarantee covered KRW 68.8 trillion in deposits. The KDIC ultimately paid KRW 19.2 trillion to depositors at a total of 236 financial institutions that failed, predominantly merchant banks.

Keywords: blanket guarantee, Korea, Korea Deposit Insurance Corporation, liquidity

JEL Classification: G01, G28