View from the Inside

• Author: Chungwon Kang
• Position: Before joining Seoul Bank
• Pages: 44-46

The Korean CEO who managed Seoul Bank's restructuring and successful privatization in 2000-02 recounts his experience

Page 44

In Late 1997, when it approached the IMF for assistance, Korea was in the midst of a full-blown banking crisis, with Seoul Bank at the forefront. The crisis was brought on by the bankruptcies of several large industrial conglomerates and contagion from the financial crises that had begun in Thailand. But Seoul Bank was in bad shape even before the onset of the Asian crisis. Its difficulties were attributable to weak management following two decades of infighting since a merger in 1976; the tradition for Korean banks, at the government's direction, to provide credit for industrial development, leaving them with weak commercial orientation and limited risk-management discipline; and generally lax prudential regulations.

As part of the banking sector restructuring, the IMF identified Seoul Bank and Korea First Bank as the country's most distressed commercial banks. To prepare Seoul Bank for early sale to foreign investors, the government recapitalized it in January 1998, thereby assuming control; removed its management; and appointed a financial advisor to develop a privatization strategy. This initial plan included obtaining bids for the bank's sale by mid-November 1998. With each subsequent IMF review of the restructuring, the IMF and the government set tight deadlines for reprivatization, making management's job more difficult.

Although Seoul Bank sold its training center, halved the number of overseas branches, and reduced the workforce by 35 percent by the end of 1998, its ratio of loans (assets) to employees remained among the lowest in the industry. And unfavorable market conditions delayed the government's plan. By June 1999, Seoul Bank was again insolvent, and, in September, the government injected a second round of new capital. With no interested buyers, Seoul Bank drifted into a fix-and-sell mode. In contrast, the government sold Korea First "as is" to Newbridge Consortium. Although it was generally recognized that Seoul Bank required more extensive restructuring than Korea First Bank, the latter took more public money because the "put-back" option, which lasted until the end of 2002, required the government to cover any unexpected losses on preexisting commitments.

In April 2000, Deutsche Bank was appointed financial and restructuring advisor, and, in May, the government hired me to prepare Seoul Bank for privatization. Although a Korean banker, I was the first from a non-Korean bank to be appointed CEO of a government-controlled bank. My challenge was to bring in quickly as many professionals as possible with the necessary expertise to build a new corporate culture centered on international best practices in banking. By June 2002, Seoul Bank was successfully restructured (see table), resulting in its sale and privatization in December 2002. The road we traveled offers insights into fixing up distressed banks in crisis situations.

Page 45

Downsizing

When I joined Seoul Bank, it was organized by seniority rather than by function. Functional responsibilities were...