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CORPORATE FINANCE
LECTUR
ER
CASE ANALYSIS
SHINHAN FINANCIAL GROUP (A)
(PRODUCT NUMBER: HBS 9-305-075)
TEAM MEMBERS
ABRAHAM
20134725
STEPHEN
20134777
STEVEN
20134778
WINNIE
20134788
DECEMBER 8, 2014
A.
MENSAH
MAGARA
BAMEKA
KABATESI
1. (1) Why many Korean banks suffer from the financial distress after the
onset of the Asian financial crisis?
i.
Many experts believe and argue that the banking community will not be
affected. Too big to fail policy.
ii.
Huge and sudden reversal of capital inflows; economies that had been
attracting large amounts of foreign capital suddenly became subject to
withdrawals of short-term lines of credit, an exodus of portfolio capital
Offshore flight by domestic investors.
iii.
Conglomerate and Government Dependencies; business conglomerates and
the government in a close relationship to one another and Korean banks did
not ask them to present consolidated financial statements to assess the
financial positions and performances of the business groups as a whole. The
result was a highly leverage corporate sector and a banking sector whose
financial health was dependent upon that of the corporate sector.
iv.
Most banks were allowed to invest in stocks and real assets on their own
account, the values of their portfolios became directly vulnerable to asset
price fluctuations as well. Koreas real estate market went through price
bubble.
v.
Exposure to exchange rate risk, between 1995 and 1997, the international
claims had risen by 30% from 77 billion dollars to 103 billion. The banks both
local and international enjoyed implicit government guarantees against the
insolvency of Korean banks and could thus take higher risks.
Why not in the past?
i.
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The Asian crises generally involved excesses and imbalances associated with the
private sector: current account deficits, external debts, over-reliance on financing
via debt versus equity, and weak financial systems threatened by credit booms.
Moreover, the Asian governments, in general, were in a position to absorb the
private sector deleveraging, in particular by banks, on their balance sheets. The
resolution of a substantial portion of the resulting international debt problems
largely involved private sector-to-private-sector negotiations without significant
government intermediation. On the other hand, the origins of the European crises
were also largely, but not exclusively, in the private sector in connection with credit
booms. Their resolution, however, quickly involved the public sector. Moreover, in
many but not all the European cases, governments were not positioned easily to
absorb the debts of the private sectoragain, those of banks on their balance
sheets. In Europe, private sector debt problems more virulently metastasized into
public sector debt problems.
5. Preparedness.
Another difference in the origins of the crises in Asia and Europe is that the
Europeans were unprepared to deal with their crises, in particular, in the face of
their substantially higher degree of economic and financial integration. The lack of
European preparedness included an absence of institutions experienced at
managing crises for a group of countries bound together in a monetary union. This
institutional weakness, which was not relevant in Asia, where countries were on
their own, came on top of the fact that a substantial number of the European
countries had stock and/or flow fiscal problems that meant that they were
substantially less well positioned to deal with their own problems even if they could
have ignored spillover and contagion effects, which they could not. Although the
individual Asian countries were the source and recipients of substantial contagion
from their neighbors, they were not closely locked together economically and
financially.
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