## 1. Recapitalization of Korean Banks––December 2000

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### Introduction and purpose
- Personal account by the CEO appointed to Seoul Bank on May 24, 2000; mission to fix Seoul Bank and prepare it for reprivatization; left November 1, 2002 after merger agreement with KDIC and Hana Bank.
- Intended audience: policymakers and practitioners dealing with distressed bank restructurings in crisis situations.
- Acknowledged support from IMF Asia and Pacific Department, Monetary and Financial Systems Department, IMF Resident Representative office in Seoul, and Fund missions to Korea.

### Background and timeline of deterioration
- Origins and pre-crisis history:
  - Established 1959 as Bank of Seoul; merged with Korea Trust Bank in 1976; renamed Seoul Bank in 1995.
- Key financial deterioration events and figures:
  - End-1996: stated nonperforming assets 9 percent of total assets; W 167 billion loss for 1996; CEO arrested November 1996.
  - 1997: fall of Daenong group (May 1997); W 917 billion net loss for 1997.
  - 1998:
    - Dong-Ah Construction exposure W 984 billion; Woobang Construction exposure W 171 billion at end-1998.
    - Net loss W 2.2 trillion in 1998.
    - NPL-related charges in 1998–99 totaled W 4.7 trillion, including W 3.4 trillion for higher provisioning requirements.
  - 1999: Daewoo Group companies entered work-out (August 1999); net loss remained W 2.2 trillion in 1999.
- Cumulative losses and provisions:
  - Accumulated losses 1996–end-1999: W 5.5 trillion.
  - NPL-related charges 1998–99: W 4.7 trillion.

### Causes and structural weaknesses behind failure
- Reported loss composition:
  - W 1.7 trillion from introduction of forward-looking criteria in 1999 and from new bankruptcies.
  - W 1.3 trillion loss from sales of under-reserved NPLs to Korea Asset Management Company (KAMCO).
- Government recapitalizations to cover reserve shortfalls and NPL sale losses:
  - Two recapitalizations in January 1998 and September 1999 totaling W 4.8 trillion.
- Structural and institutional weaknesses:
  - Longstanding factional management culture; weak commercial orientation; limited risk-management discipline.
  - Lax prudential regulations (legal lending limit did not apply to Trust Accounts supervised by the Ministry of Finance).
  - Banking Law limit on single-investor ownership (4 percent) facilitated government control and CEO appointments.
- Conclusion from source: Seoul Bank described as “a not-so-innocent victim of unfortunate circumstances.”

### IMF-supported program, nationalization, and recapitalizations
- Program commitments and initial actions:
  - LOI addendum dated December 24, 1997: government to place Seoul Bank and KFB under intensive supervision and remove management by February 25, 1998.
  - January 1998 nationalization/recapitalization: 8 to 1 reverse stock split; KDIC and MOFE injected W 750 billion each into each bank (W 1.5 trillion total to each bank); resulting government ownership 93.4 percent.
- Privatization adviser and outcomes:
  - Morgan Stanley appointed lead manager/advisor for privatization (May 1998).
  - KFB: Newbridge Consortium/KDIC investment agreement signed September 1999; transaction closed December 1999 (51:49 JV, Newbridge full management control).
  - Seoul Bank: HSBC negotiations February–September 1999 broke down.
- Second recapitalization for Seoul Bank:
  - Late September 1999 KDIC injected W 3.3 trillion; resulting KDIC ownership 93.6 percent (MOFE diluted to 6.4 percent).
  - Strategic shift to “fix and sell.”
- Deutsche Bank engagement:
  - Appointed April 2000 as financial and restructuring advisor.
  - Government assurance July 12, 2000: banks under government ownership to be operated on a fully commercial basis, but government ownership constraints persisted.

### Banking sector restructuring context and government recapitalization figures
- Early restructuring (1998–1999):
  - Fifth LOI (February 7): twelve banks below 8 percent BIS at end-1997 to submit plans by end-April 1998.
  - Five regional banks closed end-June 1998 via purchase and assumption.
  - Hanvit Bank created through mergers with KDIC injecting W 3.3 trillion in September 1998; merger completed January 1999.
- By early 1999 government major shareholder in five nationwide commercial banks: Seoul Bank, KFB, Chohung Bank, Hanvit Bank, Korea Exchange Bank.
- Second-stage restructuring (late August 2000):
  - FSC instructed six banks to submit management improvement plans by end-September 2000 (criteria: < 8 percent BIS as of June 30, 2000, or having received public funds and still weak).
  - Seoul Bank exempted due to Deutsche Bank advisory process.
- Determinations end-September 2000:
  - Six banks determined insolvent as of end-September 2000.
  - KDIC injected W 4.1 trillion at end-2000 to raise BIS ratios to 10 percent after full capital reduction.
- Financial holding company measures:
  - Government announced creation early 2001; Hanvit, Peace, Kwangju, Gyungnam to be included; these became subsidiaries of Woori Finance Holding Company in April 2001.
  - Seoul Bank given six-month window to be sold to foreign investors by end-June 2001 to avoid inclusion.

### Selected government recapitalization and support figures (exact amounts preserved)
- Summary items cited:
  - W 1.7 trillion (forward-looking criteria introduction in 1999 and new bankruptcies).
  - W 1.3 trillion loss from sales of under-reserved NPLs to KAMCO.
  - Two recapitalizations in January 1998 and September 1999 totaling W 4.8 trillion.
- Table 1 (Recapitalization of six banks; In billions of won):
  - Capital injection:
    - Hanvit: 2,764.4
    - Seoul: 610.8
    - Kwangju: 170.4
    - Cheju: 53.1
    - Peace: 273.0
    - Gyungnam: 259.0
    - Total: 4,130.7
  - Contributions*:
    - Hanvit: 1,877.6
    - Seoul: 221.6
    - Kwangju: 273.1
    - Cheju: 161.5
    - Peace: 338.9
    - Gyungnam: 94.0
    - Total: 2,970.3
  - Total:
    - Hanvit: 4,642.0
    - Seoul: 832.4
    - Kwangju: 443.5
    - Cheju: 214.6
    - Peace: 611.9
    - Gyungnam: 353.0
    - Total: 7,101.0
  - Note: *Contributions covered net worth deficiencies as of end-September 2000 and stock valuation/trading losses through end-November 2000. KDIC issued IOUs for contributions and funded the IOUs in September 2001. Two-step recapitalization required by Special Law for Public Funds Management (December 2000).
- Table 2 (Selected Government Financial Support items; Seoul Bank totals in billions of won):
  - Recap.: 4,820
  - NPL Purchase: 3,036
  - Sub-debt Purchase: 270
  - Total: 8,126
  - Korea First Bank totals:
    - Recap.: 5,709
    - NPL Purchase: 3,031
    - Sub-debt Purchase: 142
    - Total: 8,882
  - Additional chronology:
    - November 1997: first KAMCO NPL purchases from newly created “Nonperforming Assets Fund.”
    - December 1997: government purchased subordinate debt to raise year-end BIS ratios.
    - January 1998 recapitalization W 1.5 trillion (KDIC cash and MOFE shares), 8 to 1 share reduction, post-recapitalization shareholding 46.7 percent KDIC, 46.7 percent MOFE, 6.6 percent public.
    - Newbridge paid about W 500 billion for 51 percent of KFB; government provided put-back option for KFB portfolio.
    - Seoul Bank found insolvent again by June 1999; KDIC injected W 3.3 trillion in September 1999.
    - As of December 2000 KDIC injected W 4.1 trillion to raise BIS ratios of six banks to 10 percent.

### Management instability, consequences, and organizational deficiencies
- Management turnover and dependence on government:
  - Three interim CEOs and one regular CEO between November 1996 and May 2000.
  - Dependence on government financial support since January 1998 bailout.
  - Government struggled to find viable strategy until spring 2000.
- Consequences of prolonged uncertainty (explicit points):
  - Management alienation from shareholder government and possibly employees.
  - Extreme cutbacks on investments, including people; many interim decisions.
  - Customer alienation due to deteriorating service and postponed sales/appointments.
  - Increased sense of helplessness and active labor union.

### Restructuring in practice — CEO selection, management formation, and operational overhaul
- CEO selection and management composition:
  - Deutsche Bank initiated CEO search April 2000; author selected in May 2000.
  - Management autonomy and prompt public funds injection were assured by Deutsche Bank’s due diligence.
  - By early December 2000: management team of ten (seven outside hires, three internal promotions).
  - October redundancy program: 640-person redundancy.
- Operational restructuring with Deutsche Bank:
  - Implementation Services Agreement addendum signed June 30, 2000.
  - About 20 Deutsche Bank commercial bankers mobilized July 2000 on-site.
  - Thirteen project teams launched mid-July covering retail banking, international banking, treasury and market risk management, credit risk management, accounting and control, audit, compliance, information technology, and more.
  - Project methodology: Deutsche Bank advisors led teams with 3–5 Seoul Bank staff each; recommendations, implementation assistance, and “train the trainer” knowledge transfer.
  - Many projects completed by early 2001 (document truncates here).

### Operational restructuring and international best practices (2001)
- Accounting and control project:
  - Database management and management information reporting system implementation delayed into May when Implementation Services Agreement expired.
- Credit risk management:
  - Restructuring overseen by three Deutsche Bank credit specialists seconded July 2000–July 2001.
- Meeting cadence:
  - Weekly meetings with Deutsche Bank project heads until December 2000; bi-weekly in 2001 with more frequent team-management interactions; periodic reports to board/shareholder.
- Key implemented practices by early 2001:
  - Functional organization: three business divisions (retail banking, corporate banking, trust business) and five support divisions (planning, operations, accounting, credit, information technology).
  - Independent, consolidated credit department; segregation of front office and back office duties.
  - Specialized business lines separating retail from corporate banking.
  - Branch overhaul: segregated front-office and back-office functions, separate corporate and retail officer groups.
  - Process mapping and manualization of operations; audit system based on systems and procedures.
  - Management information system and strengthened risk management.

### Employees, labor relations, and training
- Workforce reductions and union context:
  - After January 1998 recapitalization, workforce reduced ~35 percent from 7,500 to 4,800 by end-1998 (average among Korean commercial banks in 1998 was 34 percent).
  - Headcount as of June 2000: 4,643; about 80 percent union members; effectively closed union shop for grades 4 and below.
- Labor actions and engagement:
  - Federation organized general strike and rally July 11; Seoul Bank’s union participated but assured branches would remain open; strike ended same day.
  - Union leader later supported restructuring and agreed in principle to implement an Early Retirement Program (ERP).
- Training center and culture program:
  - Training center capacity 340 in eight rooms, mock branch layout, completed toward end-September.
  - Mandatory basic English class for head office department heads and four-hour international best practices (IBP) culture program; 40 IBP sessions held October–early November; IBP became common employee phrase.

### Early Retirement Program (ERP) — September 2000 (Table 3 exact figures)
- Pre-ERP headcount by grade:
  - Grade 1: 32
  - Grade 2: 172
  - Grade 3: 440
  - Grade 4: 1,821
  - Clerical: 2,082
  - Others: 80
  - Total: 4,627
- Reductions by grade:
  - Grade 1: 30
  - Grade 2: 78
  - Grade 3: 135
  - Grade 4: 345
  - Clerical: 56
  - Others: 1
  - Total reductions: 645
- Post-ERP headcount by grade:
  - Grade 1: 2
  - Grade 2: 94
  - Grade 3: 305
  - Grade 4: 1,476
  - Clerical: 2,026
  - Others: 79
  - Total: 3,982
- Reduction ratios (percent):
  - Grade 1: 94
  - Grade 2: 45
  - Grade 3: 31
  - Grade 4: 19
  - Clerical: 3
  - Others: 1
  - Overall reduction: 14
- Outcomes:
  - Some 80 percent of department heads left via ERP and were replaced by younger grade-two or grade-three officers.
  - 275 of 290 branch managers were replaced.

### Balance-sheet restructuring, NPL cleanup, and provisioning
- NPL and provisioning status:
  - End-June 2000: Seoul Bank NPL ratio 20 percent (highest among banks) with insufficient reserves.
  - Second half 2000: charged close to W 1 trillion to credit reserves.
  - Credit reserve balance for 2000: W 1.4 trillion.
- Actions to reduce market risk and impaired assets:
  - Late June 2000: instructed liquidation of W 50 billion Korean stock in trading portfolio.
  - July 2000 LOI with IMF: termination of forbearance on loan loss reserves for “voluntary” workout credits by December 31, 2000.
  - Workout credits reclassified and reserves charged for 2000 year-end closing.
- Sales and dispositions (notable items):
  - Foreign obligor disposals: US$128 million disposed beginning October 2000; US$104 million exposure remained end-2000 with 56 percent provision on remaining balance.
  - US$128 million of securities issued by Korean companies sold or redeemed second half 2000; remaining balance US$52 million end-2000.

### Corporate workout cases, creditor decisions, and regulatory pressure
- Exposure to five companies in “voluntary” workouts: total exposure W 705 billion; W 241 billion provisioned end-1999.
- Woobang Construction (June 2000):
  - Total borrowings W 1.2 trillion; Seoul Bank owed W 181 billion and had 26 percent voting share among bank creditors.
  - Woobang requested W 155 billion new loans in early July; creditor group advanced W 44.4 billion as partial advance.
  - Due diligence August 2000 found inadequate accounting and negative survival value; audit firm refused to sign first-half 2000 financials.
  - August 28 creditor vote rejected remaining W 111 billion loan request with 54.8 percent consenting votes (75 percent required).
  - Company filed for court receivership shortly after.
- Dong-Ah Construction:
  - October 30 creditor vote on W 346 billion new loans received only 25.3 percent consenting votes for a company with total borrowings W 2.3 trillion.
- Regulatory tightening:
  - September 27 President Kim announced completion of second-stage restructuring by end-2000.
  - FSS instructed banks to submit lists of nonviable companies to be exited, using forward-looking criteria for firms with borrowings W 50 billion or more.
  - FSS warned banks they would be held accountable for letting weak companies survive.

### NPL dispositions and asset clean-up (Table 4 and selected transactions)
- Total dispositions 2000–2001: W 3,235.9 (Table 4 quarterly totals: 744.1 / 934.9 / 524.7 / 721.1 / 311.1).
- Sales and write-offs (selected exact amounts):
  - Sale to KAMCO totals: 655.7 (2nd Half 2000), 143.3 (1Q 2001), 4.9 (2Q 2001), 64.4 (3Q 2001) = 868.3 total.
  - Sale to private buyers totals: 360.0 (2nd Half 2000), –35.5 (1Q 2001), – (2Q 2001), 8.5 (3Q 2001) = 404.0 total.
  - Write-offs totals: 109.6 (2nd Half 2000), 198.6 (1Q 2001), 221.2 (2Q 2001), 102.9 (3Q 2001), 189.6 (4Q 2001) = 821.9 total.
  - ABS issue: 446.8 (single quarter) = 446.8 total.
  - Collateral sales and others totals: 274.5 / 80.6 / 124.7 / 166.5 / 48.6 = 694.9 total.
- Notable transactions:
  - December 2000: NPLs W 404 billion sold via auction to Lone Star and GE Capital Consortium; no loss due to sufficient provisioning.
  - January 2001: W 670 billion NPL sale to KAMCO for W 312 billion (Seoul Bank exposures included Woobang W 191 billion and Dong-Ah W 380 billion); no loss against net book value.
  - September 2001 ABS: W 447 billion of NPLs transferred into ABS; credits transferred valued W 158 billion had W 309 billion reserve, resulting in W 20 billion gain retained in reserve.
- Impact:
  - NPL ratio declined rapidly from June 30, 2001.
  - End-2001 loan portfolio among cleanest in market; by end-June 2002 net NPL ratio lower than all other banks.

### Nonperforming Loans (Seoul Bank exact figures from Table 5)
- June 2000: NPLs 2,285.3; Ratio 20.0 percent.
- June 2001: NPLs 1,027.6; Ratio 8.6 percent.
- September 2001: NPLs 435.7; Ratio 3.6 percent.
- December 2001: NPLs 320.0; Ratio 2.4 percent.

### Rebuilding business strategy and organizational change
- Strategic vision: “Small but Strong and Clean Bank.”
- Primary business focus:
  - Retail banking, particularly household mortgage loans, followed by credit cards.
  - Custody business to be defended/improved subject to rating upgrade.
  - Minimize market risk business.
- Organizational measures:
  - Created Retail Banking Division headed by former Citibanker; integrated Credit Card Business Department into Retail Division.
  - Created Marketing Department within Retail Division.
  - Reorganized Call Center to report to head of Retail Banking Division; invested to increase volume.
  - Consolidated back office under Chief Operations Officer; Operations Center established June 2001.
  - Management information system retail-line reporting available Q1 2001.

### Retail loan growth (Table 6 exact figures; In billions of won)
- Seoul Bank:
  - Total Retail Loans: 2000 = 1,752.9; 2001 = 5,351.1; Percentage Increase = 206.
  - Mortgage Loans: 2000 = 716.9; 2001 = 2,890.7; Percentage Increase = 303.
- Seoul Bank was the fastest growing retail bank in 2001 (comparative figures preserved in source).

### Culture change, image, and employee perceptions
- Management reforms to promote informality and transparency (selected measures):
  - CEO bank e-mail opened to employees; abolished accompanying male secretary; reduced CEO office space; renamed daily meeting; freed CEO-only elevator; closed executive dining room; CEO decrees on stock trading, nonbusiness internet use, insider reporting (real-name then anonymous); open door policy for department heads; removed televisions in departments.
- Employee perception survey (840 employees, June 2001) findings:
  - Good acceptance of new leadership and restructuring; support for new branch system.
  - Grades three and below remained dependent on labor union.
  - Self-assessment higher than assessments of peers, superiors, and management on international best practice.
  - Shortcomings: lagging investment in equipment/premises; limited change in employee welfare due to MOUs cost restrictions.
- New image initiatives:
  - October: launched “Green Square” logo.
  - Late December: main branch renovation reflecting new branch concept.
  - January 1, 2001: resumed television advertising (first since 1997).

### Final recapitalization, MOU, and sale timing constraints
- Mid-December 2000: recapitalization agreed with KDIC to raise BIS ratio to 10 percent.
- Government imposed sale deadline: sell within six months (end-June 2001) or be included in financial holding company.
- Management prepared two-year MOU and financial projections with Deutsche Bank; key quarterly indicators included BIS ratio, return on asset ratio, cost ratio, adjusted revenue per employee, NPL ratio, net NPL ratio.
- KDIC rejected initial management targets; compromise December 30: KDIC accepted management numbers for first two quarters of 2001 conditional on sale by end-June 2001; if sale unsuccessful, management would resign and KDIC numbers would apply from Q3 2001.
- Consequence: from Q3 2001 Seoul Bank’s cost ratio and adjusted revenue per employee fell short of MOU targets; KDIC did not adjust MOU targets after unsuccessful sale attempts, constraining management.

### Performance summary (selected P&L and balance-sheet figures preserved exactly)
- Profit & Loss (Table 7; In billions of won):
  - Operating income before provision: 1999.12 = 329.4; 2000.12 = 91.2; 2001.12 = 283.4; 2002.3 = 78.3; 2002.6 = 162.7; 2002.9 = 238.3.
  - Net interest income: 1999.12 = 284.9; 2000.12 = 387.1; 2001.12 = 337.2; 2002.3 = 98.6; 2002.6 = 198.7; 2002.9 = 306.0.
  - Non-interest income: 1999.12 = 250.4; 2000.12 = 69.4; 2001.12 = 301.9; 2002.3 = 74.9; 2002.6 = 145.7; 2002.9 = 209.5.
  - Operating expenses: 1999.12 = 363.9; 2000.12 = 365.3; 2001.12 = 355.7; 2002.3 = 95.2; 2002.6 = 181.7; 2002.9 = 277.2.
  - Provision (new/refund): 1999.12 = 440.2; 2000.12 = 942.1; 2001.12 = 277.3; 2002.3 = 21.2; 2002.6 = 59.0; 2002.9 = 95.8.
  - Operating income: 1999.12 = 110.8; 2000.12 = 850.9; 2001.12 = 6.1; 2002.3 = 57.2; 2002.6 = 103.7; 2002.9 = 142.5.
  - Non-operating income (incl. tax): 1999.12 = 2,343.9; 2000.12 = 331.1; 2001.12 = 54.6; 2002.3 = 0.6; 2002.6 = 4.6; 2002.9 = 6.1.
  - Net income: 1999.12 = 2,233.1; 2000.12 = 519.8; 2001.12 = 101.4*; 2002.3 = 56.6; 2002.6 = 108.3; 2002.9 = 136.4.
    - *Including deferred tax income of W 40.7 billion.
- Balance-sheet highlights (Table 8; In billions of won):
  - Total assets: 1999.12 = 26,797.3; 2000.12 = 20,437.4; 2001.12 = 23,373.8; 2002.3 = 25,868.1; 2002.6 = 25,881.6; 2002.9 = 26,724.2.
  - Total loans: 1999.12 = 12,680.3; 2000.12 = 11,570.4; 2001.12 = 13,348.0; 2002.3 = 15,155.4; 2002.6 = 16,021.8; 2002.9 = 16,810.5.
    - Corporate loans: 9,207.1 / 8,660.2 / 6,822.7 / 7,033.2 / 7,266.9 / 7,357.3.
    - Household loans: 2,183.2 / 2,258.0 / 6,247.9 / 7,808.9 / 8,473.7 / 9,210.5.
      - Mortgage loans: 459.3 / 716.9 / 2,890.5 / 3,761.0 / 4,471.8 / 5,329.4.
  - Total Shareholder’s Equity: 1999.12 = 1,043.6; 2000.12 = 550.8; 2001.12 = 685.6; 2002.3 = 958.1*; 2002.6 = 918.2*; 2002.9 = 903.0*.
    - *Valuation gains on FRN-typed KDIC balance: W 158.3 (March 2000), W 130.6 (June 2000), W 92.7 (September 2000).

### Operational and quality achievements (ISO and service recognitions)
- First-mover process and quality initiatives:
  - Segregated front-office/back-office duties; consolidated back-office under Chief Operations Officer (first Korean bank to do so).
  - Established Operations Center in head office (June 2001) — centralized branch back-office functions (first Korean bank).
  - Awards:
    - Highest honor in Customer Satisfaction Management (November 2001).
    - Best Quality Service Certificate (April 2002) from Korea Management Association.
  - ISO certifications:
    - Only ISO 9001-certified domestic call center (March 2002).
    - ISO 9001 for Custody operations (first for a Korean bank, June 2002).
    - ISO 9002 for Share Registrar operations (first for a Korean bank, September 2002).
  - Achieved rating parity with Korea First Bank and Hanmi Bank by early 2002 (per Moody’s comparisons in source).

### Comparison with Korea First Bank (select 30 June 2001 metrics; exact figures)
- Employees and branches:
  - Seoul Bank employees: 3,861; Korea First Bank employees: 4,282.
  - Seoul Bank branches: 294; Korea First Bank branches: 392.
- Paid-in capital (billions of won):
  - Seoul Bank: 610.8; Korea First Bank: 980.6.
- Ownership:
  - Seoul Bank KDIC: 100.0
  - Korea First Bank Newbridge: 51.0 and KDIC/MOFE: 49.0
- Selected management ratios:
  - BIS Capital Adequacy:
    - Seoul Bank 2000 = 10.05; 2001 = 9.22; 2002.6 = 10.14.
    - Korea First Bank 2000 = 13.40; 2001 = 13.29; 2002.6 = 12.88.
  - Return on Assets:
    - Seoul Bank 2000 = -2.53; 2001 = 0.51; 2002.6 = 0.94.
    - Korea First Bank 2000 = 1.13; 2001 = 0.86; 2002.6 = 0.39.
  - Cost Ratio:
    - Seoul Bank 2000 = 66.6; 2001 = 59.4; 2002.6 = 53.7.
    - Korea First Bank 2000 = 58.8; 2001 = 68.5; 2002.6 = 72.3.
  - Revenue/Employee (million won):
    - Seoul Bank 2000 = 124; 2001 = 152; 2002.6 = 176.
    - Korea First Bank 2000 = 159; 2001 = 159; 2002.6 = 168.
  - NPL Ratio:
    - Seoul Bank 2000 = 19.75; 2001 = 2.44; 2002.6 = 1.97.
    - Korea First Bank 2000 = 10.38; 2001 = 2.51; 2002.6 = 4.57.
- Interpretation from source: Seoul Bank suppressed costs and maximized revenue and business volume relative to KFB during 2001–June 2002, despite investment constraints from MOUs.

### Sale process, bids, and final transaction
- Sale timeline:
  - Early February 2001: one-week U.S. road show followed by Asian cities.
  - April 2001: information memorandum dispatched to four parties; first auction run by Deutsche Bank.
  - May–June 2001: prospective buyers backed out or sought NPL protection; DBCP submitted proposal referencing NPL protection.
  - PFOC granted KDIC three months to negotiate with DBCP; talks terminated early October 2001.
  - April 2002: Banking Act amendment increased single-shareholder limit to 10 percent.
  - July 2002: three parties selected for on-site due diligence; Lonestar and Hana Bank finalists.
- Final offers (exact figures and valuations):
  - Lonestar final offer: W 950 billion cash, with government sharing upside potential up to W 250 billion; Lonestar valuation W 7,776 per share before upside sharing.
  - Hana Bank final offer: W 1.15 trillion in shares of the new merged bank (~30 percent of new bank); Hana valuation W 9,414 per share.
  - Government recapitalization in December 2000 had been at W 5,000 per share.
- Outcome:
  - PFOC selected Hana Bank as preferred buyer (August 2002); PFOC approved sale mid-September 2002; merger agreement signed September 27, 2002.

### Government, board, governance structure, and trade-offs
- Five government entities involved in public-funds banks and roles:
  - KDIC: nominal shareholder; administered MOUs; focused on minimizing downside risks; performed at least four quarterly MOU audits per year.
  - FSS: regulator and administrator of rehabilitation plans; prudential, program, and quarterly rehabilitation audits.
  - FSC: regulatory policymaker with licensing powers.
  - MOFE: parent of KDIC; overall financial industry policy responsibility.
  - Korea Board of Audit (KBA): super auditor for public funds matters; annual audits treating Seoul Bank as a public institution in some audits.
- Structural consequence:
  - KDIC reported to MOFE; policymaker (MOFE/FSC) at top, regulator (FSS) middle, shareholder (KDIC) bottom, KBA overseeing all.
  - Passive shareholder bias favored downside protection over active commercial shareholder behavior; constrained restructuring managers.
- Board role and composition:
  - Board of five or six outside directors and two inside directors (CEO and standing auditor).
  - Outside directors largely government-appointed; chair an outside director.
  - Outside directors actively supported restructuring operationally and morally; attendance near 100 percent; twenty extraordinary board meetings in 2001.
  - Government/shareholder rarely consulted outside directors on bank status or timing of sale.
- Governance mechanisms and trade-offs:
  - Independent credit committees headed by CCOs; outside-director-majority boards and audit committees; KDIC and FSS frequent audits; KBA audits from 2001.
  - Trade-off: heavy oversight diluted bottom-line accountability and limited board power; MOUs imposed detailed requirements on CEO and board; standing auditor often exempt from reprimand when management mismanagement occurred.
  - Special Law for the Management of Public Funds and PFOC creation increased transparency/accountability but also layers of oversight that constrained managerial flexibility.

### Retrospect, timing, and concluding lessons
- Structural embedding of best practices:
  - By mid-2001 Seoul Bank had implemented international best practices in organization, systems, processes, and culture.
  - Restructuring seen as cumulative process requiring time to reach critical mass.
- Timing sensitivity:
  - Rapid retail/mortgage growth and NPL cleanup were time-sensitive; delays of months could have undermined outcomes.
  - Sale timing set by policymakers can be arbitrary and conflict with restructuring progress; sale is political event while restructuring is a process.
- Final assessment:
  - Despite early alienation from government shareholder and employee tensions, restructuring produced a commercially attractive, cleaner institution sold at favorable timing.
  - Emphasized conclusion: “Bank restructuring is a process, not an event.”

*Italic source: Excerpt from IMF Working Paper _wp03235 (Seoul Bank restructuring narrative, tables, and figures as provided in the supplied content).*

### 1. Recapitalization of Korean Banks––December 2000 ....................................................8

### 1. Recapitalization of Korean Banks––December 2000

### Introduction
- Personal account by a banker appointed CEO of Seoul Bank on May 24, 2000, after the bank was effectively nationalized by the Korean government early in the 1997–98 financial crisis.
- Prior experience: five years at Citibank, 15 years at Bankers Trust Company, and one year at Deutsche Bank after its acquisition of Bankers Trust in June 1999.
- Mission: fix Seoul Bank and prepare it for reprivatization.
- Outcome: left Seoul Bank on November 1, 2002, after signing a merger agreement with the Korea Deposit Insurance Corporation (KDIC) and Hana Bank, which bought 100 percent of the shares of Seoul Bank at terms satisfactory to KDIC.
- Acknowledges support and interest from IMF’s Asia and Pacific Department, Monetary and Financial Systems Department, the IMF Resident Representative office in Seoul, and Fund missions to Korea.

### Purpose and scope of the paper
- Main focus: record Seoul Bank’s restructuring efforts within the Korean government’s financial sector restructuring program supported by the IMF after the 1997–98 crisis.
- Intended audience: policymakers and practitioners dealing with distressed bank restructurings in crisis situations.

### Background

#### A. Seoul Bank Before the Crisis
- Origins and corporate history:
  - Established in 1959 as the Bank of Seoul by local entrepreneurs.
  - Merged with Korea Trust Bank in 1976—the first bank merger in Korea—forming Bank of Seoul and Trust Company.
  - Renamed Seoul Bank in 1995, the year it recorded a small net income before deteriorating further.
- Internal issues:
  - Post-merger rivalry between factions from the pre-merger banks persisted into the mid-1990s, disrupting management coherence.
- Timeline of financial deterioration and key events:
  - 1996:
    - Financial problems surfaced with bankruptcies of several second tier business groups for which Seoul Bank was the main creditor.
    - At end-1996, stated nonperforming assets amounted to 9 percent of total assets.
    - Recorded a W 167 billion loss for the year.
    - In November 1996, the CEO was arrested on bribery charges; managing director appointed interim CEO.
  - 1997:
    - Fall of Daenong group in May 1997 further strained the bank.
    - After nine months with an interim management team, a former Deputy Superintendent of Banks was appointed CEO in August 1997.
    - The bank closed 1997 with a W 917 billion net loss.
  - 1998:
    - Second half of 1998: Dong-Ah Construction and Woobang Construction were placed into “voluntary” work-out programs; Seoul Bank was the main creditor for both.
    - Exposures at end-1998: Dong-Ah Construction W 984 billion; Woobang Construction W 171 billion.
    - Only minimal reserves were set aside for these exposures.
    - Net loss swelled to W 2.2 trillion in 1998.
    - NPL-related charges in 1998–99 totaled W 4.7 trillion, comprising:
      - W 3.4 trillion for higher provisioning requirements from more strict standards for loan classifications.
  - 1999:
    - In August 1999, 12 Daewoo Group companies entered “voluntary” work-out programs.
    - The bank’s net loss remained at W 2.2 trillion in 1999 as NPL-related charges mounted.
- Cumulative losses and provisions:
  - Accumulated losses from 1996 to end-1999 were W 5.5 trillion.
  - Total NPL-related charges in 1998–99: W 4.7 trillion (including the W 3.4 trillion item noted above).

*Source: _wp03235 - 1. Recapitalization of Korean Banks––December 2000*

### introduction of forward-looking criteria in 1999 (W 1.7 trillion) and from new bankruptcies

### introduction of forward-looking criteria in 1999 (W 1.7 trillion) and from new bankruptcies

### A. Causes and structural weaknesses behind Seoul Bank’s failure
- Accumulated losses reported:
  - W 1.7 trillion from introduction of forward-looking criteria in 1999 (W 1.7 trillion) and from new bankruptcies (W 1.7 trillion).
  - W 1.3 trillion loss from sales of under-reserved NPLs to Korea Asset Management Company (KAMCO).
- Government recapitalizations covering reserve shortfalls and NPL sale losses:
  - Two recapitalizations by the government in January 1998 and September 1999, totaling W 4.8 trillion.
- Structural and institutional weaknesses cited:
  - Structurally weak management from two decades of factional in-fighting.
  - Korean banking tradition emphasizing banks as providers of credit for industrial development, producing banks with weak commercial orientation and limited risk management discipline.
  - Generally lax prudential regulations; e.g., Bank of Korea’s Bank Supervision Office had general supervisory authority but the legal lending limit for single obligor did not apply to banks’ lending through Trust Accounts (supervised by the Ministry of Finance).
  - Absence of a governance structure for banking beyond the government’s roles as supervisor, regulator, and policymaker; Banking Law limited single-investor ownership in banks to 4 percent, facilitating government control and appointment of bank CEOs.
- Conclusion: Given this environment, Seoul Bank was described as “a not-so-innocent victim of unfortunate circumstances.”

### B. Seoul Bank in the IMF-supported program: nationalization, recapitalization, and privatization efforts
- Early IMF program commitments:
  - Addendum to the LOI dated December 24, 1997: government committed to place Seoul Bank and Korea First Bank (KFB) under intensive supervision, assume control, and remove management responsible for losses by February 25, 1998.
- January 1998 nationalization/recapitalization of both Seoul Bank and KFB:
  - 8 to 1 reverse stock split.
  - KDIC and the Ministry of Finance and Economy (MOFE) injected W 750 billion each into each bank, for a total of W 1.5 trillion to each of the two banks.
  - Resulting government ownership: 93.4 percent.
- Privatization and adviser appointments:
  - Morgan Stanley appointed lead manager/advisor for privatization of both banks in May 1998.
  - Newbridge Consortium/KDIC terms of investment agreement for KFB signed in September 1999; transaction closed in December 1999 (51:49 JV, Newbridge given full management control).
  - HSBC negotiations for Seoul Bank began February 1999 but broke down in early September 1999 over share, valuation, and loan classification issues.
- Second recapitalization for Seoul Bank:
  - Government injected a second round of new capital in late September 1999 to fill a larger hole; KDIC injected W 3.3 trillion in Seoul Bank, resulting in 93.6 percent ownership (MOFE did not participate and was diluted to 6.4 percent).
  - Strategic shift for Seoul Bank described as moving toward “fix and sell.”
- Deutsche Bank engagement and management changes:
  - Deutsche Bank appointed as financial and restructuring advisor in April 2000.
  - New CEO appointed in May 2000 after prolonged management vacuum.
  - Government assurance in July 12, 2000 review: “While under government ownership, banks will be operated on a fully commercial basis and the government will not be involved in the day-to-day management.” The text notes, however, that government ownership constraints hindered fully commercial operation.

### C. Banking sector restructuring context and government recapitalization efforts
- Early restructuring measures and outcomes (1998–1999):
  - Fifth LOI dated February 7: twelve banks not meeting the 8 percent BIS capital adequacy ratio at end-1997 asked to submit management improvement and capital raising plans by end-April 1998.
  - Five regional banks closed at end-June 1998 via purchase and assumption (first bank closures in Korea).
  - Four mergers announced and one FSC-ordered merger by February 1999; largest merger created Hanvit Bank with KDIC injecting W 3.3 trillion in September 1998 and merger completed January 1999.
  - First stage: five bank closures and five bank mergers.
- By early 1999 government major shareholder in five nationwide commercial banks: Seoul Bank, KFB, Chohung Bank, Hanvit Bank, Korea Exchange Bank.
- Second stage restructuring (late August 2000):
  - FSC instructed six banks (Hanvit, Chohung, Korea Exchange Bank, Peace, Kwangju, Cheju) to submit management improvement plans by end-September 2000 (criteria: less than 8 percent BIS as of June 30, 2000, or having received public funds and still considered weak).
  - Seoul Bank exempted from this immediate process due to Deutsche Bank restructuring advisory process and ongoing rehabilitation plan.
- Determinations end-September 2000:
  - Six banks determined insolvent as of end-September 2000.
  - KDIC injected a total of W 4.1 trillion at end-2000 to raise BIS capital adequacy ratios to 10 percent after complete reduction of capital for each bank.
- Financial holding company actions:
  - Government announced in late December that a financial holding company would be established in early 2001; Hanvit, Peace, Kwangju, and Gyungnam to be included. The four banks became subsidiaries of Woori Finance Holding Company in April 2001.
  - Seoul Bank was given a six-month window to escape inclusion in the holding company: if not sold to foreign investors by end of June 2001, Seoul Bank would be put into the financial holding company.

### D. Government financial support and recapitalization figures (selected exact amounts and outcomes)
- Summary of recapitalizations and losses cited at the start:
  - W 1.7 trillion (forward-looking criteria introduction in 1999 and new bankruptcies).
  - W 1.3 trillion loss from sales of under-reserved NPLs to KAMCO.
  - Two recapitalizations in January 1998 and September 1999 totaling W 4.8 trillion.
- Table 1. Recapitalization of Korean Banks–December 2000 (In billions of won) — total recapitalization injections and contributions for six banks (values preserved exactly as in source):
  - Capital injection:
    - Hanvit: 2,764.4
    - Seoul: 610.8
    - Kwangju: 170.4
    - Cheju: 53.1
    - Peace: 273.0
    - Gyungnam: 259.0
    - Total: 4,130.7
  - Contributions*:
    - Hanvit: 1,877.6
    - Seoul: 221.6
    - Kwangju: 273.1
    - Cheju: 161.5
    - Peace: 338.9
    - Gyungnam: 94.0
    - Total: 2,970.3
  - Total:
    - Hanvit: 4,642.0
    - Seoul: 832.4
    - Kwangju: 443.5
    - Cheju: 214.6
    - Peace: 611.9
    - Gyungnam: 353.0
    - Total: 7,101.0
  - Note: *Contributions covered the deficiency in net worth as of end of September 2000 as well as any stock valuation and trading losses of each bank between end of September and end of November 2000. KDIC issued IOUs for the contribution portion and funded the IOUs in September 2001. This two-step recapitalization was required by the Special Law for Public Funds Management, legislated in December 2000.
- Table 2. Korean Government Financial Support (In billions of won) — selected entries and totals preserved exactly as in source:
  - Seoul Bank totals (columns preserved as presented):
    - Recap.: 4,820
    - NPL Purchase: 3,036
    - Sub-debt Purchase: 270
    - Total: 8,126
  - Korea First Bank totals:
    - Recap.: 5,709
    - NPL Purchase: 3,031
    - Sub-debt Purchase: 142
    - Total: 8,882
  - Additional chronology and details:
    - November 1997: NPL purchases by KAMCO from the two banks represented the first KAMCO purchases from the newly created “Nonperforming Assets Fund.”
    - December 1997: government purchased some subordinate debt issued by the two banks to raise year-end BIS ratios.
    - January 1998 initial W 1.5 trillion recapitalization made jointly and equally by KDIC (in cash) and MOFE (in shares of government-owned corporations); preceded by 8 to 1 share reduction of existing public shareholders, resulting in post-recapitalization shareholding in each bank of 46.7 percent by KDIC, 46.7 percent by MOFE, and 6.6 percent by the public.
    - Newbridge paid about W 500 billion to take a 51 percent share and management control of KFB; government provided a put-back option for the existing portfolio of KFB.
    - Seoul Bank became insolvent again by June 1999; after HSBC talks broke down in August 1999, government undertook second recapitalization in September 1999 (KDIC injected W 3.3 trillion; resulting KDIC ownership 93.6 percent).
    - As of December 2000, KDIC injected W 4.1 trillion to raise BIS ratios of six banks to 10 percent.

### E. Management instability, consequences, and organizational deficiencies
- Management turnover and effects:
  - Bank lacked stable management and direction since November 1996: three interim CEOs and one regular CEO in the four-and-a-half-year period to May 2000.
  - Interim CEOs lacked authority to provide vision; frequent changes exacerbated instability.
  - Since initial bailout in January 1998, the bank was completely dependent on government financial support for survival.
  - Government struggled to find viable strategy and direction for the bank until spring 2000.
- Consequences of prolonged uncertainty (explicit points from source):
  - Management alienated from shareholder government, particularly under interim CEOs, and perhaps from employees.
  - Uncertain future and tight rehabilitation plans led to many interim decisions and extreme cutbacks on investments, including in people.
  - Customers alienated due to deteriorating customer service and frequent postponements in sale, management contract, and CEO appointments.
  - General feeling of helplessness and neglect, with an increasingly active labor union.

### F. Restructuring in practice — CEO selection, management formation, and operational overhaul
- CEO selection and management team formation:
  - Deutsche Bank initiated CEO search in April 2000 through an international human resources firm.
  - Author volunteered for interview in early May and was selected based on the HR firm’s recommendation.
  - Author requested and was assured of complete management autonomy and prompt injection of necessary public funds based on Deutsche Bank’s due diligence.
  - Rationale for accepting CEO role:
    - Belief in necessary qualifications and sense of mission.
    - Confidence in Deutsche Bank as restructuring advisor.
    - Belief in ability to assemble a qualified management team committed to international best practices.
  - Management recruitment and team composition:
    - First recruit from Citibank in mid-June 2000.
    - By early December 2000, professional management team of seven outside hires and three internal promotions (total ten in management team).
    - Outside team profile: two with over 20 years at Citibank; one American branch manager of First Chicago in Seoul; one from JP Morgan and a trading company; one with IT experience at U.S. insurance companies and a large Korean bank; two from rating agencies.
    - One existing director and the standing auditor (board member) were retained for continuity.
    - October redundancy program: 640-person redundancy.
    - Functional organization drawn up with Deutsche Bank assistance; functional delegations implemented.
    - By early 2001, employees generally accepted new management team; teamwork matured under intense work pressures.
- Operational restructuring with Deutsche Bank implementation:
  - Implementation Services Agreement with Deutsche Bank signed June 30, 2000 as addendum to Financial and Restructuring Agreement.
  - About 20 Deutsche Bank commercial bankers mobilized in July 2000 to work on-site at Seoul Bank.
  - Thirteen project teams launched in mid-July covering:
    - retail banking and operations
    - international banking
    - international trade operations
    - treasury and market risk management
    - trust banking
    - investment trust
    - securities service (share registrar)
    - credit risk management
    - accounting and control
    - audit
    - compliance
    - logistics
    - information technology
  - Approach and methodology:
    - Project teams led by Deutsche Bank advisors with 3–5 Seoul Bank staff each.
    - Teams reviewed existing procedures and organizational structures, mapped new procedures and structures, presented recommendations to management, and assisted implementation.
    - “Train the trainer” concept used to transfer knowledge to Seoul Bank restructuring team members.
    - Management removed some items initially proposed by Deutsche Bank (e.g., strategy and branch reorganization) believing they could be addressed internally.
  - Outcome timeframe:
    - Most projects were completed by early (document truncates here).

*Source: IMF PDF chapter/section content provided in the input.*

### 2001. The accounting and control project, which included building a system for database

### _wp03235 - 2001. The accounting and control project, which included building a system for database

### Operational restructuring and implementation of international best practice
- The accounting and control project, which included building a system for database management and a system for management information reporting, dragged into May when the implementation service agreement expired.
- Credit risk management restructuring implementation was overseen by a team of three Deutsche Bank commercial bank credit specialists seconded to work inside Seoul Bank from July 2000 to July 2001.
- Meetings and oversight:
  - Until December 2000, management met with the Deutsche Bank project team heads every Thursday.
  - In 2001, joint meetings became bi-weekly, with more frequent discussions between project teams and appropriate management members.
  - Periodic updates were presented to the board and the shareholder on operational restructuring progress.
- Key concepts of international best practice implemented by early 2001:
  - Created a functional organization structure: three business divisions (retail banking, corporate banking, trust business) and five support divisions (planning, operations, accounting, credit, information technology).
  - Created an independent and consolidated credit department.
  - Segregated duties between front office and back office.
  - Established specialized business lines, separating retail from corporate banking business.
  - Overhauled branch banking by segregating front-office and back-office functions in each branch and appointing one group of officers for corporate banking and one for retail banking business.
  - Instituted process mapping and manualization of operational functions for controlled back-office operations.
  - Introduced an audit system based on systems and procedures.
  - Created a management information system and strengthened the risk management system.

### Seoul Bank employees, labor relations, and training
- Workforce reductions and context:
  - After the first government recapitalization in January 1998, the bank reduced workforce by some 35 percent from 7,500 to 4,800 by the end of 1998.
  - The average headcount reduction among Korean commercial banks in 1998 was 34 percent.
- Headcount and unionization as of June 2000:
  - Total headcount: 4,643.
  - About 80 percent were union members.
  - The bank had an effectively closed union shop; employees in grades 4 and below all belonged to the union except for a few in sensitive positions.
  - The union leader was a key member of the Korean Federation of Financial Unions.
- Labor actions and management response:
  - The Federation organized a general strike and rally for July 11; Seoul Bank’s union participated while assuring branches would remain open.
  - The strike ended the same day; Seoul Bank’s union was among the last to withdraw.
  - Management held a meeting with senior managers to convey expectations; the union leader subsequently supported restructuring and agreed in principle to implement an early retirement program (ERP).
- Training center and culture program:
  - A training center on the second floor of the head office building with capacity for 340 people in eight rooms and a mock branch layout was completed toward the end of September.
  - Initial mandatory offerings included a basic English class for head office department heads and a four-hour class in international best practices developed by a corporate-culture building firm.
  - Forty sessions of the IBP program were held between October and early November; “IBP” became a common phrase among employees.

### Early Retirement Program (ERP) — September 2000 (Table 3 data)
- Objective: rapid replacement of senior staff and wide personnel changes.
- Pre-ERP headcount by grade:
  - Grade 1: 32
  - Grade 2: 172
  - Grade 3: 440
  - Grade 4: 1,821
  - Clerical: 2,082
  - Others: 80
  - Total: 4,627
- Number of reductions:
  - Grade 1: 30
  - Grade 2: 78
  - Grade 3: 135
  - Grade 4: 345
  - Clerical: 56
  - Others: 1
  - Total reductions: 645
- Post-ERP headcount by grade:
  - Grade 1: 2
  - Grade 2: 94
  - Grade 3: 305
  - Grade 4: 1,476
  - Clerical: 2,026
  - Others: 79
  - Total: 3,982
- Reduction ratio (in percent):
  - Grade 1: 94
  - Grade 2: 45
  - Grade 3: 31
  - Grade 4: 19
  - Clerical: 3
  - Others: 1
  - Overall reduction: 14
- Outcomes:
  - Some 80 percent of the department heads left through the program and were replaced by younger grade-two or grade-three officers.
  - 275 of 290 branch managers were replaced.

### Balance-sheet restructuring, NPL cleanup, and provisioning
- NPL and provisioning context:
  - At the end of June 2000, the bank had the highest NPL ratio among banks: 20 percent, and insufficient reserves.
  - In the second half of 2000, Seoul Bank charged close to W 1 trillion to credit reserves.
  - The credit reserve balance for the whole year 2000 was W 1.4 trillion.
- Actions to reduce market risk and impaired assets:
  - In late June, management instructed liquidation of W 50 billion worth of Korean stock in the trading portfolio.
  - The July 2000 LOI with the IMF included termination of forbearance regarding loan loss reserves related to “voluntary” workout credits by December 31, 2000.
  - As forbearance was lifted, workout credits were reclassified and appropriate reserve amounts charged for 2000 year-end book closing.
- Sales and dispositions:
  - First sale of impaired assets: foreign currency loans and securities for non-Korean obligors.
    - Disposed exposure: US$128 million to obligors in eight countries starting in October, leaving US$104 million exposure in three countries by end-2000 with a 56 percent provision on the remaining balance.
  - US$128 million of securities issued by Korean companies was sold or redeemed during the second half of 2000; remaining balance in this portfolio category was valued at US$52 million at the end of 2000.

### Corporate workout cases, creditor decisions, and regulatory pressure
- Exposure and workout program context:
  - In June 2000, Seoul Bank was a main bank for, and had exposure to, five companies in “voluntary” workout programs (put into programs between 1998 and early 1999).
  - Creditor institutions followed a 75 percent consent rule regarding proposals for these companies.
  - Seoul Bank’s total exposure to the five companies amounted to W 705 billion, against which W 241 billion was provisioned at the end of 1999.
  - Dong-Ah Construction and Woobang Construction were two largest exposures among the five.
- Woobang Construction case:
  - Total borrowings of Woobang Construction in June 2000: W 1.2 trillion.
  - Seoul Bank was owed: W 181 billion and had a 26 percent voting share among bank creditors.
  - Woobang requested new loans of W 155 billion in early July; creditor group advanced W 44.4 billion as a partial advance.
  - Due diligence in late August indicated inadequate accounting information and that estimated survival value was less than liquidation value; audit firm refused to sign off first-half financials for 2000.
  - On August 28, the bank creditor group voted to reject the remaining W 111 billion loan request with 54.8 percent consent votes (about 20 percentage points short of the required 75 percent).
  - The company filed for court receivership a few days later, becoming the first company unplugged from a workout program.
  - Political and regional pressures: Woobang was the largest surviving company in Daegu; the decision was framed as a conflict between regional social interests and creditor commercial interests, placing Seoul Bank in a pivotal role given its 26 percent voting share.
- Regulatory tightening and Dong-Ah Construction case:
  - On September 27, President Kim, Dae-Jung announced completion of second-stage restructuring in corporate and financial sectors by end of 2000.
  - In early October, the Financial Supervisory Service (FSS) instructed banks to submit lists of nonviable companies to be exited from the market using specified forward-looking criteria for firms with borrowings of W 50 billion or more and other internal standards.
  - The FSS asked banks to redo initial lists using tougher standards and warned banks they would be accountable for letting weak companies survive.
  - Under the new regulatory posture, creditors met on October 30 to vote on Dong-Ah Construction’s request for W 346 billion in new loans; with total borrowings of W 2.3 trillion, the request received only 25.3 percent consenting votes.

*Source: _wp03235 - 2001. The accounting and control project, which included building a system for database*

### 16.7 percent voting share and did not consent. The outside directors of the board of Seoul

### _wp03235 - 16.7 percent voting share and did not consent. The outside directors of the board of Seoul

### Disposition of Nonperforming Loans (NPLs) and Asset Clean-up
- Table 4 summary (In billions of won): Total dispositions in 2000–2001 amounted to W 3,235.9.
  - Sale to KAMCO: 655.7 (2nd Half 2000), 143.3 (1Q 2001), 4.9 (2Q 2001), 64.4 (3Q 2001) = 868.3 total.
  - Sale to private buyers: 360.0 (2nd Half 2000), –35.5 (1Q 2001), – (2Q 2001), 8.5 (3Q 2001) = 404.0 total.
  - Write-offs: 109.6 (2nd Half 2000), 198.6 (1Q 2001), 221.2 (2Q 2001), 102.9 (3Q 2001), 189.6 (4Q 2001) = 821.9 total.
  - ABS issue: –– – – 446.8 – 446.8.
  - Collateral sales and others: 274.5 (2nd Half 2000), 80.6 (1Q 2001), 124.7 (2Q 2001), 166.5 (3Q 2001), 48.6 (4Q 2001) = 694.9 total.
  - Quarterly totals shown: 744.1 / 934.9 / 524.7 / 721.1 / 311.1 = 3,235.9.
- December 2000: NPLs totaling W 404 billion sold via auction to Lone Star and GE Capital Consortium; no loss incurred due to sufficient provisioning.
- January 2001: W 670 billion NPL sale to KAMCO for W 312 billion (Seoul Bank exposure included Woobang W 191 billion and Dong-Ah Construction W 380 billion); no loss against net book value.
- September 2001 ABS: W 447 billion of NPLs transferred into ABS; credits transferred valued at W 158 billion had W 309 billion in reserve, resulting in a gain of W 20 billion (kept in reserve, not recognized as income).
- Impact:
  - NPL ratio declined rapidly from June 30, 2001.
  - By end-2001, loan portfolio among the cleanest in the market; by end-June 2002, net NPL ratio lower than all other banks.

### Nonperforming Loans in Korean Banks (select figures)
- Seoul Bank NPLs and NPL ratios (from Table 5):
  - June 2000: NPLs 2,285.3; Ratio 20.0 percent.
  - June 2001: NPLs 1,027.6; Ratio 8.6 percent.
  - September 2001: NPLs 435.7; Ratio 3.6 percent.
  - December 2001: NPLs 320.0; Ratio 2.4 percent.
- Comparative NPL snapshots for other banks are tabulated in source (Hanvit, Hana, Shinban, KEB, Chohung, Hanmi, IBK, Kookmin) with June 2000 through December 2001 figures.

### Rebuilding Business: Strategic Focus and Organizational Change
- Strategic reorientation:
  - Vision: “Small but Strong and Clean Bank.”
  - Primary business focus: retail banking, particularly household mortgage loans, followed by credit cards; custody business to be defended and improved subject to rating upgrade; minimize market risk business.
- Pre-crisis portfolio composition:
  - Traditionally >80 percent corporate loans; as of end-June 2000 still 80 percent corporate despite 30 percent asset decline since end-1997.
- Organizational changes:
  - Created Retail Banking Division headed by former Citibanker; Credit Card Business Department integrated into Retail Division.
  - Created Marketing Department within Retail Division.
  - Reorganized Call Center reporting line: made to report directly to head of Retail Banking Division; invested to increase volume.
  - Consolidated back office under Chief Operations Officer; Operations Center established in head office (June 2001).
  - Management information system report with separate retail line available Q1 2001.

### Retail Loan Growth (Table 6; In billions of won)
- Seoul Bank:
  - Total Retail Loans: 2000 = 1,752.9; 2001 = 5,351.1; Percentage Increase = 206.
  - Mortgage Loans: 2000 = 716.9; 2001 = 2,890.7; Percentage Increase = 303.
- Comparative bank retail growth included for KFB, Hanvit, Chohung, Shinhan, Hana, KEB, Hanmi, Kookmin with 2000 and 2001 totals and mortgage figures; Seoul Bank fastest growing retail bank in 2001.

### Culture Change and New Image: Concrete Steps
- Management reforms to promote informality, openness, and transparency included:
  - CEO’s bank e-mail opened to employees; abolished accompanying male secretary tradition; reduced CEO office space; renamed daily meeting; freed CEO-only elevator; closed executive dining room to encourage team lunches; CEO decrees prohibiting stock trading and nonbusiness internet use; decree on “insider reporting” (initially real-name, later anonymous reports allowed); open door policy for department heads; removed televisions in departments.
- Employee perception survey (840 employees, June 2001) findings:
  - Good acceptance of new leadership and restructuring; support for new branch system; grades three and below still dependent on labor union.
  - Self-assessment higher than assessments of peers, superiors, and management on international best practice.
  - Shortcomings: lagging investment in equipment and premises; not much change in employee welfare (due to cost restrictions from shareholder MOUs).
- New image initiatives:
  - October: launched “Green Square” logo to signal new identity.
  - Late December: main branch renovation completed reflecting new branch concept (separated corporate/retail spaces; glass walls; customer event stage; coffee stand).
  - January 1, 2001: resumed television advertising (first time since 1997).

### Final Recapitalization and Memorandum of Understanding (MOU)
- Mid-December 2000: recapitalization amount to raise BIS ratio to 10 percent agreed with KDIC.
- Government announced bank must be sold within six months (end-June 2001) or included in financial holding company.
- Management prepared two-year MOU and financial projections with Deutsche Bank; key quarterly indicators: BIS ratio, return on asset ratio, cost ratio, adjusted revenue per employee, NPL ratio, net NPL ratio.
- KDIC rejected initial management targets; compromise on December 30: KDIC accepted management numbers for first two quarters of 2001 on condition that if sale unsuccessful by end-June 2001, management would resign and KDIC numbers would apply from Q3 2001.
- Consequence: from Q3 2001 Seoul Bank’s cost ratio and adjusted revenue per employee fell short of MOU targets; KDIC did not adjust MOU targets after unsuccessful sale attempts, creating ongoing constraint.

### Performance Summary (Operating results and P&L)
- Operating trends:
  - From Q1 2001, quarterly operating income before provision grew while NPL ratio fell.
  - By Q1 2002, consistent earnings track record and relatively clean balance sheet.
  - New income mainly from growing retail business (interest income) and credit card business (fee income).
- Hynix exposure and provisioning:
  - Hynix exposure about W 260 billion at time of government recapitalization end-2000; classified as precautionary with 19 percent reserve.
  - December 2001: charged additional W 150 billion to credit reserve due to Hynix restructuring; loan exposure completely written off end-2001; retained W 71 billion convertibles, converted in May 2001 and sold with a small loss.
- Table 7: Profit and Loss (In billions of won)
  - Operating income before provision: 1999.12 = 329.4; 2000.12 = 91.2; 2001.12 = 283.4; 2002.3 = 78.3; 2002.6 = 162.7; 2002.9 = 238.3.
  - Net interest income: 1999.12 = 284.9; 2000.12 = 387.1; 2001.12 = 337.2; 2002.3 = 98.6; 2002.6 = 198.7; 2002.9 = 306.0.
  - Non-interest income: 1999.12 = 250.4; 2000.12 = 69.4; 2001.12 = 301.9; 2002.3 = 74.9; 2002.6 = 145.7; 2002.9 = 209.5.
  - Operating expenses: 1999.12 = 363.9; 2000.12 = 365.3; 2001.12 = 355.7; 2002.3 = 95.2; 2002.6 = 181.7; 2002.9 = 277.2.
  - Provision (new/refund): 1999.12 = 440.2; 2000.12 = 942.1; 2001.12 = 277.3; 2002.3 = 21.2; 2002.6 = 59.0; 2002.9 = 95.8.
  - Operating income: 1999.12 = 110.8; 2000.12 = 850.9; 2001.12 = 6.1; 2002.3 = 57.2; 2002.6 = 103.7; 2002.9 = 142.5.
  - Non-operating income (incl. tax): 1999.12 = 2,343.9; 2000.12 = 331.1; 2001.12 = 54.6; 2002.3 = 0.6; 2002.6 = 4.6; 2002.9 = 6.1.
  - Net income: 1999.12 = 2,233.1; 2000.12 = 519.8; 2001.12 = 101.4*; 2002.3 = 56.6; 2002.6 = 108.3; 2002.9 = 136.4.
    - *Including deferred tax income of W 40.7 billion.

### Operational and Quality Achievements (ISO and process)
- Implemented international best practices and first-mover initiatives among Korean banks:
  - Segregated front office and back office duties; consolidated back-office functions under Chief Operations Officer (first Korean bank to do so).
  - Established Operations Center in head office (June 2001) — centralized branch back office functions (first Korean bank to do so).
  - Customer service recognitions: Highest honor in Customer Satisfaction Management (November 2001) and Best Quality Service Certificate (April 2002) from Korea Management Association.
  - ISO achievements:
    - Only ISO 9001-certified domestic call center (March 2002).
    - ISO 9001 certification for Custody operations (first for a Korean bank, June 2002).
    - ISO 9002 certification for Share Registrar operations (first for a Korean bank, September 2002).
  - Achieved same rating as Korea First Bank and Hanmi Bank by early 2002 (from Moody’s comparisons noted).

### Balance Sheet Highlights (Table 8; In billions of won)
- Total assets: 1999.12 = 26,797.3; 2000.12 = 20,437.4; 2001.12 = 23,373.8; 2002.3 = 25,868.1; 2002.6 = 25,881.6; 2002.9 = 26,724.2.
  - Bank account: 22,128.4 / 19,139.5 / 21,731.3 / 24,242.5 / 24,188.1 / 25,178.1.
  - Trust account: 4,668.9 / 1,297.9 / 1,642.5 / 1,625.6 / 1,693.5 / 1,546.1.
- Total loans: 1999.12 = 12,680.3; 2000.12 = 11,570.4; 2001.12 = 13,348.0; 2002.3 = 15,155.4; 2002.6 = 16,021.8; 2002.9 = 16,810.5.
  - Corporate loans: 9,207.1 / 8,660.2 / 6,822.7 / 7,033.2 / 7,266.9 / 7,357.3.
  - Household loans: 2,183.2 / 2,258.0 / 6,247.9 / 7,808.9 / 8,473.7 / 9,210.5.
    - Mortgage loans: 459.3 / 716.9 / 2,890.5 / 3,761.0 / 4,471.8 / 5,329.4.
  - Other loans: 1,290.0 / 652.2 / 277.4 / 313.3 / 281.2 / 242.7.
- Total Shareholder’s Equity: 1999.12 = 1,043.6; 2000.12 = 550.8; 2001.12 = 685.6; 2002.3 = 958.1*; 2002.6 = 918.2*; 2002.9 = 903.0*.
  - *Valuation gains on FRN-typed KDIC balance noted: W 158.3 (March 2000), W 130.6 (June 2000), W 92.7 (September 2000).

### Comparison with Korea First Bank (select 30 June 2001 metrics)
- Seoul Bank vs Korea First Bank:
  - Number of employees: Seoul Bank 3,861; Korea First Bank 4,282.
  - Number of branches: Seoul Bank 294; Korea First Bank 392.
  - Paid in capital (in billions of won): Seoul Bank 610.8; Korea First Bank 980.6.
  - Ownership: Seoul Bank KDIC: 100.0; Korea First Bank Newbridge: 51.0 and KDIC/MOFE 49.0.
  - New management: Seoul Bank June 2000; Korea First Bank January 2000.
- Key management ratios (selected; In percent or stated units):
  - BIS Capital Adequacy: Seoul Bank 2000 = 10.05; 2001 = 9.22; 2002.6 = 10.14. Korea First Bank 2000 = 13.40; 2001 = 13.29; 2002.6 = 12.88.
  - Return on Assets: Seoul Bank 2000 = -2.53; 2001 = 0.51; 2002.6 = 0.94. Korea First Bank 2000 = 1.13; 2001 = 0.86; 2002.6 = 0.39.
  - Cost Ratio: Seoul Bank 2000 = 66.6; 2001 = 59.4; 2002.6 = 53.7. Korea First Bank 2000 = 58.8; 2001 = 68.5; 2002.6 = 72.3.
  - Revenue/Employee (in million won): Seoul Bank 2000 = 124; 2001 = 152; 2002.6 = 176. Korea First Bank 2000 = 159; 2001 = 159; 2002.6 = 168.
  - NPL Ratio: Seoul Bank 2000 = 19.75; 2001 = 2.44; 2002.6 = 1.97. Korea First Bank 2000 = 10.38; 2001 = 2.51; 2002.6 = 4.57.
- Interpretation: Seoul Bank suppressed costs and maximized revenue and business volume relative to KFB during 2001–June 2002, aided by constraints on investment from MOUs.

### Sale Process and Reprivatization
- Timeline and process:
  - Early road shows: one-week U.S. road show (early February 2001), followed by major Asian cities.
  - April 2001: information memorandum dispatched to four parties; first auction process run by Deutsche Bank.
  - May–June 2001: prospective buyers backed out or sought NPL protection; only DBCP submitted proposal which referenced NPL protection.
  - PFOC granted KDIC three more months to negotiate with DBCP; talks terminated in early October 2001.
  - Privatization plan prepared; amendment to Banking Act passed in April 2002 (single-shareholder limit increase to 10 percent; elimination possible for qualifying specialized financial groups).
  - July 2002: three parties selected for on-site due diligence; one dropped; Lonestar and Hana Bank remained finalists.
- Final offers and sale:
  - Lonestar final offer: W 950 billion cash, with government sharing upside potential up to W 250 billion; Lonestar valuation W 7,776 per share before upside sharing.
  - Hana Bank final offer: W 1.15 trillion in shares of the new merged bank (~30 percent of new bank); Hana valuation W 9,414 per share. Government’s recapitalization in December 2000 had been at W 5,000 per share.
  - PFOC selected Hana Bank as preferred buyer (August 2002); PFOC approved sale mid-September 2002; merger agreement signed September 27, 2002.

### Broader Issues: Government, Board, and Governance
- Role of government: five entities involved in public-funds banks
  - KDIC: nominal shareholder; administered MOUs; strict administrator focused on minimizing downside risks; performed at least four quarterly MOU audits a year.
  - FSS: regulator and administrator of rehabilitation plans; performed prudential audits, program audits, and quarterly rehabilitation plan audits.
  - FSC: regulatory policymaker; held licensing powers.
  - MOFE: parent of KDIC; responsible for overall financial industry policy.
  - Korea Board of Audit (KBA): super auditor auditing public funds matters and government entities; annual audit of public-funds-invested banks; treated Seoul Bank as a public institution in some audits.
- Structural consequence:
  - KDIC reported to MOFE, acting as nominal shareholder/administrator; policymaker (MOFE/FSC) at top, regulator (FSS) middle, shareholder (KDIC) bottom, with KBA overseeing all.
  - Passive shareholder bias: arrangement favored minimizing downside risk over active shareholder seeking upside; created constraints that frustrated restructuring manager seeking commercial value.
- Role of the Board:
  - Board composition during tenure: five or six outside directors and two inside directors (CEO and standing auditor); outside directors largely government-appointed (corporate executives, university professors, lawyer, editorial writers, accounting adviser, two KDIC officers); board chair an outside director.
  - Outside directors actively supported restructuring, provided moral support, attendance near 100 percent; twenty extraordinary board meetings in 2001; Audit Committee members reviewed documents intensely after standing auditor resignation.
  - Government/shareholder rarely consulted outside directors on bank status or timing of sale, representing a missed resource.
- Governance issues:
  - Two primary governance aims: prevent arbitrary credit decisions and check moral hazard of management.
  - Measures: independent credit committees headed by CCOs; outside-director-majority boards and audit committees with standing auditor; KDIC and FSS frequent audits; KBA audits from 2001.
  - Trade-offs: governance structure so heavy on checks diluted bottom-line accountability and limited board power (MOUs imposed detailed requirements on CEO and board); standing auditor often exempt from reprimands when management found guilty of mismanagement.
  - Policy context: Special Law for the Management of Public Funds and PFOC creation intended to provide transparency and accountability, but also increased layers of oversight that constrained managerial flexibility.

### Retrospect and Conclusion: Key Lessons and Timing
- By mid-2001 Seoul Bank embedded international best practices in organization, systems, processes, and culture; restructuring viewed as a cumulative process requiring time to achieve critical mass.
- Timing critical:
  - Rapid growth in retail and mortgage lending and concurrent NPL cleanup were time-sensitive; delays of months could have jeopardized outcomes.
  - Sale timing dictated by policymakers may be arbitrary and can conflict with restructuring progress; the sale of a public-funds-invested bank is an event of political significance while restructuring is a process requiring time.
- Final assessment:
  - Despite early alienation from the government shareholder and later employee tensions, the bank’s restructuring produced a commercially attractive, cleaner institution that was sold in favorable timing.
  - “Bank restructuring is a process, not an event.” — observation emphasized in conclusion.

*Italic source: Excerpt from IMF Working Paper _wp03235 (Seoul Bank restructuring narrative, tables, and figures as provided in the supplied content).*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2003/_wp03235.pdf_