South Korea’s Financial Structure Essay Sample
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South Korea’s Financial Structure Essay Sample
South Korea has the same financial structure as other countries which consist of the ministry of finance, central bank and commercial banks and the general public. South Korea in recent decades has been one of the most dynamic economies in the world. Over the period from 1965 to 1990, the rate of growth per capita GNP (gross national product) was greater than that of any other country in the world. Now we need to look in more detail to examine into the financial system of South Korea and how it affects their economics. One of the institutions of their financial system is the Ministry of Strategy and Finance or MOSF. The current minister is Bahk Jaewan. The ministry’s main goal is to manage the economic policy in a way that stabilizes the livelihood of citizens while doing it’s utmost for the stabilization of prices and creation of jobs and enhance the soundness of the economy and thoroughly prepare for any domestic or overseas turbulence.
MOSF has enforcement functions as well. It oversees the National Tax Tribunal and the Financial Intelligence Unit. The tasks of the Ministry of Strategy and Finance are: 1) Planning and coordination of the mid to long-term socio-economic development goals and setting economic policy direction on an annual basis. 2) Distributing resources effectively and assessing the effectiveness of budget execution. 3) Planning/reforming Korea’s tax policy and system. 4) Planning and management of policies for the treasury, government properties, government accounting and the national debt.
5) Coordination of policies for foreign currency transactions and international finance. 6) Enhancement of international cooperation and promotion of inter-Korean economic exchanges and cooperation. 7) Management and monitoring of public institutions’ operation. The Ministry of Strategy and Finance (MOSF) carried out a bidding to compose of a syndicate group for 30-year KTB (Korea Treasury Bond) on Aug. 28 2012. According to the bidding result, the issue rates of 30-year KTB in September (KRW 406 billion) are decided at 3.05% and 3.08%. Total tax revenue in 2012 was 203.0 trillion won, an increase of 10.6 trillion won or 5.5 percent from 2011. However, despite an increase in the revenue, the budget ran a deficit of 2.8 trillion won, or 1.3 percent, spending 205.8 trillion won.
(Trillion won, %)
| 2011 revenue| 2012| Change from 2011| Compared with 2012 budget| |
| budget| revenue| amount| %| amount| %|
Total tax revenue| 192.4| 205.8| 203.0| 10.6| 5.5| -2.8| -1.3| General account| 185.0| 197.3| 196.2| 11.2| 6.1| -1.1| -0.6| Special account| 7.4| 8.5| 6.9| -0.6| -7.7| -1.6| -19.2| *Special accounts include the liquor tax and Rural Area Development Tax.
The details for tax increases and decreases are as follows. The income tax, corporate tax, value-added tax and environment tax saw an increase in revenue. Both the consolidated income tax and earned income tax revenues increased year-on-year due to economic growth and honest tax reporting. However, revenue from the earned income tax was lower than expected when compared with the budget estimate.
The Korean government decided, at the Cabinet meeting on January 3, to frontload 72% percent (213.6 trillion won) of the budget in the first half of 2013 to provide a boost to the economy in the face of the current economic slowdown. Due to persisting global economic uncertainties, the government is promoting early fiscal response measures to actively respond to Korea’s continuing economic slowdown. In order to reach a 60% target for public expenditures (which includes the budget, public funds, and public institutions) in the first half of the year, 72% of the overall budget has been allotted to the first half of the year.
<Regular and Special Accounts (Total)>
Classification| 2013 Budget| 1st Quarter| 2nd Quarter| 3rd Quarter| 4th Quarter| Budget Allotment| Amount | 298,405.7| 134,623.7| 79,010.0| 54,030.3| 30,741.7| | Ratio (%)| 100.0| 45.1| 26.5| 18.1| 10.3|
The second part of their financial institutions is the Central bank. The South Korean central bank is name the Bank of Korea. The Bank of Korea was established as the central bank on June 12, 1950. Its major functions included the issuance of all currency; the formulation and execution of monetary and credit policies; the conduct of the bulk of foreign exchange control business; the research, collection, and preparation of statistics on many aspects of South Korea’s financial system; and the supervision and regulation of the activities of private banks. The Bank of Korea engaged in loan and deposit transactions for the government; additionally, the bank transacted various government business activities. It also made loans to and received deposits from other banking institutions; all banks maintained their solvency through balances at the Bank of Korea.
The Bank of Korea regulated all commercial banking activities under the provisions of the General Banking Act passed in 1954. Commercial banks got their money through deposits from the general public, international loans, and funds borrowed from the Bank of Korea. The lending activities of commercial banks focused on short-term loans or discounts because long-term lending was still the prerogative of such specialized banks as the Korea Exchange Bank, Korea Housing Bank, and National Agricultural Cooperatives Federation. In the late 1980s, the banking industry operated according to a “prime” bank system whereby each major South Korean bank was assigned one domestic commercial bank.
Under specific legislation designed to achieve certain functions or to assist special markets, six special banks received funds from the government and from the sales of debentures. Recently, South Korea’s central bank held interest rates steady for a fourth straight month on Thursday, in line with market expectations, as the world’s biggest economies show signs of improvement and domestic inflation remains low. The Bank of Korea’s monetary policy committee held its base rate steady at 2.75 percent, a media official said without elaborating. Governor Kim Choong-soo is due to hold a news conference from 11:20 a.m. The third part of the financial institution is commercial banks. South Korea’s financial sector in the late 1980s included a diversified commercial banking system, a securities market, and a wide range of secondary financial institutions. The banks kept pace with the rest of the economy, particularly after the liberalization and modernization of financial institutions in the mid-1980s and the establishment of the capital market system.
Commercial banks in South Korea provide services for businesses, organizations and individuals. Services include offering current, deposit and saving accounts as well as giving out loans to businesses. Commercial banks make their profits by taking small, short-term, relatively liquid deposits and transforming these into larger, longer maturity loans. This process of asset transformation generates net income for the commercial bank. The government still maintained strong managerial controls over these banks through the Bank of Korea’s Office of Bank Supervision and Examination, which, under the guidance of the Monetary Board, supervised and regularly examined banking institutions. Most of the credit provided by these banks went to the chaebol (financial clicks which included large companies like Daewoo, Samsung, Hyundai, LG, etc.), but the banks also were required by law to make at least one-third of their business loans to small and medium-sized firms The Bank of Korea regulated all commercial banking activities under the provisions of the General Banking Act passed in 1954.
Commercial banks got their money through deposits from the general public, international loans, and funds borrowed from the Bank of Korea. The lending activities of commercial banks focused on short-term loans or discounts because long-term lending was still the prerogative of such specialized banks as the Korea Exchange Bank, Korea Housing Bank, and National Agricultural Cooperatives Federation. In the late 1980s, the banking industry operated according to a “prime” bank system whereby each major South Korean bank was assigned one domestic commercial bank. Under specific legislation designed to achieve certain functions or to assist special markets, six special banks received funds from the government and from the sales of debentures.
The commercial banking system in South Korea was established in the late 1980’s along with a securities market and a wide range of secondary financial institutions as part of the Five-Year Economic and Social Development Plan. The five major privately held commercial banks in South Korea are Hana Financial Group, KB Financial Group, Shinhan Financial Group, NH Financial Holding Company and Woori Finance Holding Co. Ltd. Woori is the largest asset holding commercial bank with 318,707,406 Korean Won (or $278.232 billion in U.S. dollars) as of June 30, 2012 and over 1000 domestic banks and 15 international banks. The last part of the financial institution is the General Public which includes individuals, small and medium size business which all use commercial banks. Shinhan Bank provides checking, savings, insurance, investment, mortgages and consumer finance services.
The general public is the citizens of the nation of South Korea and Big companies such as Samsung, LG and Hyundai and millions of small business. In Korea, the biggest companies have a great effect on the country’s money supply. Most firms in Korea have a primary house bank with which they do business exclusively. Each of the largest banks is closely allied to one or more of the nation’s Chaebol or major conglomerates, giving the banks added importance in the national economy. Although the Chaebol are technically prohibited from even partial ownership of financial institutions, the tight and often exclusive links between major city banks and the conglomerates enhance the power of the chaebol and their companion banks. Firms doing business with a chaebol unit will usually be expected to channel all their financial dealings through its official bank.
There are some differences in how checking and savings accounts are used in Korea compared to the U.S. Checking accounts for the individuals in Korea are not used in the same way as the United States. In the U.S. the use of checking accounts was widely accepted and used as a way of day to day transacting using a written paper instrument or “check” to pay for bills or to pay someone or entity. For individual South Koreans checking accounts are also widely used but without the paper check.
Electronic Fund Transfers in Korea takes the place of the paper check. All other functions of the U.S. checking account are available in Korea: debit cards, credit cards, deposit, withdrawals, statements, ATM and ETF. One major difference in Korean checking accounts is a small bank book that records all transactions and verifies the account funds availability. In-bank transactions require the bank book, an ID and a personal identification stamp to validate the account holder. The bank book is updated each time a transaction is made even by Automatic Teller machines. All checking accounts do not earn interest.
There are two types of saving accounts for the individual account holder: specific term interest bearing certificate accounts like U.S. Money Market Certificates that have penalties if withdrawn early and regular interest earning savings accounts. The cultural difference of Korean people’s life affects the bank system. Korean people usually stay with their parent until they get married or rent an apartment or house. In Korea to rent a property it requires a large one time deposit normally equal to 50% of the value of the property.
It is not uncommon for a renter to put down a large down payment like $200,000. This is the only rent that is paid and there is no monthly payment for the duration of the rental. The money is returned when the rental terminates. All the rental transactions are handled through the bank and all funds are transferred electronically between parties. The difference in the bank system compared to America is that when people buy their own housing down payments and loan amounts carried are flip flopped. In Korea the down payment to the bank is 80% and the loan is 20% of the house purchase price compared to the American down payment 20% or less. It seems that Korean’s have more stock of currency than American’s.