Search

Korea’s savings banks that expanded their number of high-risk loans experienced defaults after the 2008 global financial crisis. We consider the prompt corrective action (PCA) to analyze factors that drive savings banks to failure given that an order for PCA by a supervisory authority normally leads to default. We conduct discrete choice models to estimate the probability of PCA using 2005–11 data on 103 Korea savings banks. We find that the postexamination actions taken by supervisory authorities and a rapid increase in loans increase the possibility of PCA. These results suggest that depositors and the market can reduce the costs incurred from defaults by identifying information that predicts PCA. [ABSTRACT FROM PUBLISHER]

In the aftermath of the economic crisis of 1997-1998, South Korea undertook a number of reforms in financial supervision. Questions have been raised, however, as to whether Korea has in fact succeeded in creating a system of financial supervision capable of dealing with certain risks and responding to new challenges. This article examines Korea's recent experience in financial instability resulting from misconduct by credit card companies as a case in point and argues that the postcrisis reform in financial supervision was limited to changing formal institutions for financial supervision and that further reforms will have to be undertaken in other related institutions if Korea is to improve its financial supervision. [ABSTRACT FROM AUTHOR]