1. 1 2008.6.11 Capital Market Development in Korea Can It be a New Growth Engine? Changyong Rhee Vice Chairman Financial Services Commission

2. 2 Capital Market in the Past 1 Changes after the Crisis 2 Challenges and Prospect 3 Contents

3. 3 1.Bank-Dominated Financial Structure 2.Underdeveloped Capital Market * Liquid but highly volatile Stock Market * Large but illiquid Bond Market 3. Lack of basic infrastructure * underdeveloped government bonds market: no benchmark * inactive credit rating & pricing agencies Financial Market in Korea: Past

4. 4 Bank-Dominated Financial Market and underdeveloped Local bond markets before the currency crisis: Markets for government bonds and government-guaranteed bonds were not well-developed (conservative fiscal policy) Corporate bond market was relatively large, but - Predominated by guaranteed-corp. bonds - “buy-and-hold” investors / no “marked-to-market” system Bond Market Development After the Crisis Dazzling Development of Local bond markets after the currency crisis: Government bond Market: To finance public fund for financial restructuring and boost depressed economy by fiscal pump priming (Government-led Development) Corporate bond Market: To raise funds from bond markets to overcome Banks’ reluctance to extend loans (unexpected by-product of crisis / presenting new challenges and opportunities)

5. 5 BanksITCS Corp. Bond Market Stock Market Corporations Flow of Funds restructuring Flow of Funds from Banks to Capital Market: 1998-99

6. 6 Changes in Fund Flow Before & After the financial Crisis (Indirect Financing) (Commercial Paper) (Stock) (Corporate Bond) Financing (billion won)

7. 7 Role of the Capital Market in the Fast Recovery [1] Contribution: “Spare-Tire theory” by A. Greenspan * Corporations mitigated credit crunch problems by issuing massive amount of corp. bonds: Capital market as a parallel circuit * Market interest rates were stabilized since corp. credit crunch problems were mitigated & thereby it contributed to high growth in 1999. [2] No Free Lunch * Maturity Concentration & credit crunch in 2001! * Unviable firms could extend their lives. * Easy financing reduced Chaebol’s incentive to restructure their businesses. - massive default and recurrent credit crunch - increased ultimate costs of restructuring! [3] Despite these problems, it contributed to the sophistication of capital market. (Securitization, Derivatives, Ratings, etc.)

8. 8 [Spare Tire] Capital market can develop rapidly even where all finance has previously run through the banking system. [Spare Tire or Donut Tire] While capital market financing may add flexibility, it may not necessarily be more efficient at allocating resources than the banking system. - Only large firms had access to direct financing via bond or equity. - Funding from bonds was even more concentrated than bank lending. - Capital markets seem to have many pre-requisites, such as reliable credit rating agencies, no `too big to fail' beliefs, and so on. Lessons from Capital Market Development

9. 9 [Developing NPL Market & its by-product] NPL resolution process was excessively dominated by foreign capital, but it provided many opportunities for upgrading and diversifying Korean financial Market. - Realize the importance of ‘Track Record’ and ‘Financial knowledge’ of domestic financial institutions, rather than the lack of supply of risky capital - Adapting advanced financial skills such as securitization, corporate restructuring, M&A, etc. - upgrading legal system prepared for efficient NPL disposition such as the ABS Law, Consolidated Bankruptcy Act, and Corporate Restructuring Promotion Act, and so on. * [Transparency] Understanding the importance of “Transparency” as a basic financial infrastructure (upgrading financial reporting system, transparent regulations, credit rating systems, etc.) Lessons from Financial and Corporate Restructuring

10. 10 opportunity to change “old” financial practices. - The importance of risk management was recognized.) - The financial market as an independent industry rather than a tool for the manufacturing sector development - Consumer financing became a part of the financial market - The differences between the manufacturing industry and the financial industry were understood. (The financial industry needs a steady growth rather than a rapid growth) Lessons from Financial Restructuring

11. 11 16년 6월 12일 0시 42분 32초 16년 6월 12일 0시 42분 32초 16년 6월 12일 0시 42분 32초 16년 6월 12일 0시 42분 32초 16년 6월 12일 0시 42분 32초 16년 6월 12일 0시 42분 32초 16년 6월 12일 0시 42분 32초 16년 6월 12일 0시 42분 32초 16년 6월 12일 0시 42분 32초 16년 6월 12일 0시 42분 32초 16년 6월 12일 0시 42분 32초 16년 6월 12일 0시 42분 32초 11 Banks’ Non-Performing Loan Ratio AUM of Asset Managers Total Assets of Insurance Companies Foreign Investors’ Share in Stock Market (%) (KRW trn) (%) Improvement: Resilient Financial Industry

12. 12 16년 6월 12일 0시 42분 32초 16년 6월 12일 0시 42분 32초 16년 6월 12일 0시 42분 32초 16년 6월 12일 0시 42분 32초 16년 6월 12일 0시 42분 32초 16년 6월 12일 0시 42분 32초 16년 6월 12일 0시 42분 32초 16년 6월 12일 0시 42분 32초 16년 6월 12일 0시 42분 32초 16년 6월 12일 0시 42분 32초 16년 6월 12일 0시 42분 32초 16년 6월 12일 0시 42분 32초 12 The 5 th largest equities market in Asia (2007) The 3 rd largest bond market in Asia (2007) One of the fastest growing equity assets with CAGR of 84.6% since 2003 “Changing Asia’s Financial Landscape” Market Capitalization 1 Total Equity Assets and % of Total AUM 2 Listed Corporate Bonds 3 CAGR = 36.3% CAGR = 84.6% CAGR =14.7% (US$ bn) Note: (1) KOSPI only; (2) Source: Asset Management Association of Korea, excluding Discretionary Assets ; (3) Listed KRW debentures (US$ bn) Rapidly Growing Financial Market

13. 13 16년 6월 12일 0시 42분 32초 16년 6월 12일 0시 42분 32초 16년 6월 12일 0시 42분 32초 16년 6월 12일 0시 42분 32초 16년 6월 12일 0시 42분 32초 16년 6월 12일 0시 42분 32초 16년 6월 12일 0시 42분 32초 16년 6월 12일 0시 42분 32초 16년 6월 12일 0시 42분 32초 16년 6월 12일 0시 42분 32초 16년 6월 12일 0시 42분 32초 16년 6월 12일 0시 42분 32초 Regulatory Reform Privatization Market-Friendly Services Leader in Global Financial Markets A Global Leader in Financial Markets 13 Vision and Strategies of New FSC

14. 14 16년 6월 12일 0시 42분 32초 16년 6월 12일 0시 42분 32초 16년 6월 12일 0시 42분 32초 16년 6월 12일 0시 42분 32초 16년 6월 12일 0시 42분 32초 16년 6월 12일 0시 42분 32초 16년 6월 12일 0시 42분 32초 16년 6월 12일 0시 42분 32초 16년 6월 12일 0시 42분 32초 16년 6월 12일 0시 42분 32초 16년 6월 12일 0시 42분 32초 16년 6월 12일 0시 42분 32초 14 0 1 2 3 4 5 6 7 35 302520 151051 New Zealand France US Netherlands Spain IrelandLuxembourgSwitzerland Mexico Greece 2012 South Korea Germany UK Per Capita GDP (Unit: US$10,000) 2018 Japan Financial Industry Ranking Financial Industry as a New Growth Engine

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