This paper is to review various aspects of the recent banking crisis in Korea and then to identify possible causes of the crisis based on the results of existing literature. It also intends to evaluate the measures the government has taken so far to resolve the crisis in the following senses; reduction of uncertainty in the financial market, reactivation of financial intermediation function, and improvement of banks' operational efficiency.

The paper shows that recent crisis is mainly attributable to imprudent extension of loans to large enterprises and increases in the volume of short-term liabilities denominated in foreign currency without due consideration of market risks involved in the midst of financial liberalization. Weak internal as well as external governance structure of banks, ill preparation for financial deregulation by the authorities, and various institutional factors also contributed to the crisis.

The government's measures to improve the soundness of banks mainly through purchases of bad loans by KAMCO and capital injection seem to have helped strengthen the banks' solvency to a certain extent. Resolution of five commercial banks and nationalization of two large city banks sent a strong signal to the market that banks can fail, thereby strengthening market discipline.  Still, on-going corporate restructuring process and further strengthening of asset classification standards may expand the volume of banks' non-performing loans, and increasing competition among financial institutions will be expected to aggravate bank profitability. Moreover, banks' operational efficiency is far from the level warranting the international competitiveness. The board of directors on the internal side and the securities market on the external side are not in a position to properly monitor the bank management. More seriously, the supervisory authority's ability to regulate banks prudently has not improved much yet.

In order to put banks back in the right track, the authorities should make continuous efforts to correct various institutional weaknesses and improve prudential regulation skills. Introductions of international best practices in the every aspects of banking operation will ultimately help banks gain the competitiveness. In addition, banks also have to improve loan review and risk management systems, revise management strategies to strengthen their core competence, intensify strategic alliances, and reform the organizational structure for better profitability.