Filed Pursuant to Rule 424(b)(5)
Registration No. 333-203739

The information in this preliminary prospectus supplement is not complete and may be changed. A registration statement relating to these securities has been filed with the Securities and Exchange Commission. This preliminary prospectus supplement and the accompanying prospectus is not an offer to sell these securities and we are not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.

SUBJECT TO COMPLETION, DATED MAY 11, 2015

PRELIMINARY PROSPECTUS SUPPLEMENT

(To Prospectus Dated May 7, 2015)

The Korea Development Bank

US$                    % Notes due 20    

Our US$                     aggregate principal amount of         % notes due 20     (the “Notes”) will bear interest at a rate of         % per annum. Interest on the Notes is payable semi-annually in arrears on May              and November              of each year, beginning on November     , 2015. The Notes will mature on                     , 20    .

The Notes will be issued in minimum denominations of US$200,000 principal amount and integral multiples of US$1,000 in excess thereof. The Notes will be represented by one or more global notes registered in the name of a nominee of The Depository Trust Company, as depositary.

The payment of interest and the repayment of principal on the Notes will not be guaranteed by the Government (as defined herein).

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus supplement or the accompanying prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

	Per Note		Total
Public offering price		%	US$
Underwriting discount		%	US$
Proceeds to us (before deduction of expenses)		%	US$

In addition to the initial public offering price, you will have to pay for accrued interest, if any, from and including May     , 2015.

Application will be made to the Singapore Exchange Securities Trading Limited (the “SGX-ST”) for the listing and quotation of the Notes. The SGX-ST assumes no responsibility for the correctness of any statements made, opinions expressed or reports contained in this prospectus supplement and the accompanying prospectus. Approval in-principle from, admission of the Notes to the Official List of, and the listing and quotation of any Notes on, the SGX-ST are not to be taken as an indication of the merits of the issuer or the Notes. Currently, there is no public market for the Notes.

We expect to make delivery of the Notes to investors through the book-entry facilities of The Depository Trust Company on or about May     , 2015.

Joint Bookrunners and Lead Managers

Barclays
	Citigroup
		Credit Suisse
			Goldman Sachs International
				HSBC
					KDB Asia
						SOCIETE GENERALE

Prospectus Supplement Dated May     , 2015

You should rely only on the information contained in or incorporated by reference in this prospectus supplement and the accompanying prospectus. We have not authorized anyone to provide you with different information. We are not making an offer to sell these securities in any state or jurisdiction where the offer or sale is not permitted.

TABLE OF CONTENTS

Prospectus Supplement

	Page
Summary of the Offering		S-5
Use of Proceeds		S-7
Recent Developments		S-8
Description of the Notes		S-9
Clearance and Settlement		S-11
Taxation		S-14
Underwriting		S-15
Legal Matters		S-19
Official Statements and Documents		S-19
General Information		S-19

Prospectus

	Page
Certain Defined Terms and Conventions		1
Use of Proceeds		2
The Korea Development Bank		3
Overview		3
Capitalization		7
Business		7
Selected Financial Statement Data		9
Operations		15
Sources of Funds		22
Debt		24
Overseas Operations		25
Property		26
Directors and Management; Employees		26
Tables and Supplementary Information		27
Financial Statements and the Auditors		32
The Republic of Korea		152
Land and History		152
Government and Politics		154
The Economy		158
Principal Sectors of the Economy		165
The Financial System		172
Monetary Policy		177
Balance of Payments and Foreign Trade		181
Government Finance		188
Debt		190
Tables and Supplementary Information		192

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	Page
Description of the Securities		196
Description of Debt Securities		196
Description of Warrants		203
Terms Applicable to Debt Securities and Warrants		203
Description of Guarantees to be Issued by Us		204
Description of Guarantees to be Issued by The Republic of Korea		205
Limitations on Issuance of Bearer Debt Securities and Bearer Warrants		206
Taxation		207
Korean Taxation		207
United States Tax Considerations		209
Plan of Distribution		216
Legal Matters		217
Authorized Representatives in the United States		217
Official Statements and Documents		217
Experts		217
Forward-Looking Statements		218
Further Information		220

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Certain Defined Terms

All references to “we” or “us” mean The Korea Development Bank. All references to “Korea” or the “Republic” contained in this prospectus supplement mean The Republic of Korea. All references to the “Government” mean the government of Korea. Terms used but not defined in this prospectus supplement shall have the same meanings given to them in the accompanying prospectus.

In this prospectus supplement and the accompanying prospectus, where information has been provided in units of thousands, millions or billions, such amounts have been rounded up or down. Accordingly, actual numbers may differ from those contained herein due to rounding. Any discrepancy between the stated total amount and the actual sum of the itemized amounts listed in a table, is due to rounding.

Additional Information

The information in this prospectus supplement is in addition to the information contained in our prospectus dated May 7, 2015. The accompanying prospectus contains information regarding ourselves and Korea, as well as a description of some terms of the Notes. You can find further information regarding us, Korea, and the Notes in registration statement no. 333-203739, as amended, relating to our debt securities, with or without warrants, and guarantees, which is on file with the U.S. Securities and Exchange Commission.

We are Responsible for the Accuracy of the Information in this Document

We are responsible for the accuracy of the information in this document and confirm that to the best of our knowledge we have included all facts that should be included not to mislead potential investors. The SGX-ST assumes no responsibility for the correctness of any statements made or opinions expressed or reports contained in this prospectus supplement and the accompanying prospectus. Approval in-principle from, admission of the Notes to the Official List of, and the listing and quotation of any Notes on, the SGX-ST are not to be taken as an indication of the merits of the issuer or the Notes.

Not an Offer if Prohibited by Law

The distribution of this prospectus supplement and the accompanying prospectus, and the offer of the Notes, may be legally restricted in some countries. If you wish to distribute this prospectus supplement or the accompanying prospectus, you should observe any restrictions. This prospectus supplement and the accompanying prospectus should not be considered an offer and should not be used to make an offer, in any state or country which prohibits the offering.

The Notes may not be offered or sold in Korea, directly or indirectly, or to any resident of Korea, except as permitted by Korean law. For more information, see “Underwriting—Foreign Selling Restrictions.”

Information Presented Accurate as of Date of Document

This prospectus supplement and the accompanying prospectus are the only documents on which you should rely for information about the offering. We have authorized no one to provide you with different information. You should not assume that the information in this prospectus supplement or the accompanying prospectus is accurate as of any date other than the date on the front of each document.

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SUMMARY OF THE OFFERING

This summary highlights selected information from this prospectus supplement and the accompanying prospectus and may not contain all of the information that is important to you. To understand the terms of our Notes, you should carefully read this prospectus supplement and the accompanying prospectus.

The Notes

We are offering US$                         aggregate principal amount of             % notes due                         , 20             (the “Notes”).

The Notes will bear interest at a rate of             % per annum, payable semi-annually in arrears on May              and November             , beginning on November             , 2015. Interest on the Notes will accrue from May             , 2015 and will be computed based on a 360-day year consisting of twelve 30-day months. See “Description of the Notes—Payment of Principal and Interest.”

The Notes will be issued in minimum denominations of US$200,000 principal amount and integral multiples of US$1,000 in excess thereof. The Notes will be represented by one or more global securities registered in the name of a nominee of The Depository Trust Company (“DTC”), as depositary.

The payment of interest and the repayment of principal on the Notes will not be guaranteed by the Government.

We do not have any right to redeem the Notes prior to maturity.

Listing

Application will be made to the SGX-ST for the listing and quotation of the Notes. Settlement of the Notes is not conditioned on obtaining the listing. The Notes will be traded in a minimum board lot size of S$200,000 (or its equivalent in foreign currencies) for so long as the Notes are listed on the SGX-ST and the rules of the SGX-ST so require. Accordingly, the Notes will be traded in a minimum board lot size of US$200,000.

Form and Settlement

We will issue the Notes in the form of one or more fully registered global notes, registered in the name of a nominee of DTC, as depositary. Except as described in the accompanying prospectus under “Description of the Securities—Description of Debt Securities—Global Securities,” the global notes will not be exchangeable for Notes in definitive registered form, and will not be issued in definitive registered form. Financial institutions, acting as direct and indirect participants in DTC, will represent your beneficial interests in the global notes. These financial institutions will record the ownership and transfer of your beneficial interest through book-entry accounts. You may hold your beneficial interests in the Notes through Euroclear Bank S.A./N.V. (“Euroclear”) or Clearstream Banking, société anonyme (“Clearstream”) if you are a participant in such systems, or indirectly through organizations that are participants in such systems. Any secondary market trading of book-entry interests in the Notes will take place through DTC participants, including Euroclear and Clearstream. See “Clearance and Settlement—Transfers Within and Between DTC, Euroclear and Clearstream.”

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Further Issues

We may from time to time, without the consent of the holders of the Notes, create and issue additional debt securities with the same terms and conditions as the Notes in all respects so that such further issue shall be consolidated and form a single series with the Notes. We will not issue any such additional debt securities unless such additional securities have no more than a de minimis amount of original issue discount or such issuance would otherwise constitute a “qualified reopening” for U.S. federal income tax purposes.

Delivery of the Notes

We expect to make delivery of the Notes, against payment in same-day funds on or about May             , 2015, which we expect will be the fifth business day following the date of this prospectus supplement, referred to as “T+5.” You should note that initial trading of the Notes may be affected by the T+5 settlement. See “Underwriting—Delivery of the Notes.”

Underwriting

KDB Asia Limited, one of the underwriters, is our affiliate and has agreed to offer and sell the Notes only outside the United States to non-U.S. persons. See “Underwriting—Relationship with the Underwriters.”

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USE OF PROCEEDS

The net proceeds from the issue of the Notes, after deducting the underwriting discount but not estimated expenses, will be US$            . We will use the net proceeds from the sale of the Notes for our general operations, including extending foreign currency loans and repayment of our maturing debt and other obligations.

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RECENT DEVELOPMENTS

This section provides information that supplements the information about our bank and the Republic included under the headings corresponding to the headings below in the accompanying prospectus dated May 7, 2015. Defined terms used in this section have the meanings given to them in the accompanying prospectus. If the information in this section differs from the information in the accompanying prospectus, you should rely on the information in this section.

THE REPUBLIC OF KOREA

The Economy

Gross Domestic Product

Based on preliminary data, GDP growth in the first quarter of 2015 was 2.4% at chained 2010 year prices, as aggregate private and general government consumption expenditures increased by 3.1% and gross domestic fixed capital formation decreased by 0.7%, each compared with the corresponding period of 2014.

Prices, Wages and Employment

The inflation rate was 0.6% in the first quarter of 2015. The unemployment rate was 4.1% in the first quarter of 2015.

The Financial System

Securities Markets

The Korea Composite Stock Price Index was 2,127.2 on April 30, 2015 and 2,085.5 on May 8, 2015.

Monetary Policy

Foreign Exchange

The market average exchange rate between the Won and the U.S. Dollar (in Won per one U.S. Dollar) as announced by the Seoul Money Brokerage Service Ltd. was Won 1,068.1 to US$1.00 on April 30, 2015 and Won 1,086.6 to US$1.00 on May 8, 2015.

Balance of Payments and Foreign Trade

Balance of Payments

Based on preliminary data, the Republic recorded a current account surplus of approximately US$23.4 billion in the first quarter of 2015. The current account surplus in the first quarter of 2015 increased from the current account surplus of US$15.2 billion in the corresponding period of 2014, primarily due to an increase in surplus from the goods account.

Trade Balance

Based on preliminary data, the Republic recorded a trade surplus of US$21.6 billion in the first quarter of 2015. Exports decreased by 2.8% to US$133.6 billion and imports decreased by 15.4% to US$112.0 billion from US$137.5 billion of exports and US$132.4 billion of imports, respectively, in the corresponding period of 2014.

Foreign Currency Reserves

The amount of the Government’s foreign currency reserves was US$369.9 billion as of April 30, 2015.

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DESCRIPTION OF THE NOTES

The following is a description of some of the terms of the Notes we are offering. Since it is only a summary, we urge you to read the fiscal agency agreement described below and the forms of global note before deciding whether to invest in the Notes. We have filed a copy of these documents with the United States Securities and Exchange Commission as exhibits to the registration statement no. 333-203739.

The general terms of our Notes are described in the accompanying prospectus. The description in this prospectus supplement further adds to that description or, to the extent inconsistent with that description, replaces it.

Governed by Fiscal Agency Agreement

We will issue the Notes under the fiscal agency agreement, dated as of February 15, 1991, as amended and supplemented from time to time, between us and The Bank of New York (now The Bank of New York Mellon), as fiscal agent. The fiscal agent will maintain a register for the Notes.

Payment of Principal and Interest

The Notes are initially limited to US$                         aggregate principal amount and will mature on             , 20             (the “Maturity Date”). The Notes will bear interest at the rate of             % per annum, payable semi-annually in arrears on May              and November             of each year (each, an “Interest Payment Date”), beginning on November             , 2015. Interest on the Notes will accrue from May             , 2015. If any Interest Payment Date or the Maturity Date shall be a day on which banking institutions in The City of New York or Seoul are authorized or obligated by law to close, then such payment will not be made on such date but will be made on the next succeeding day which is not a day on which banking institutions in The City of New York or Seoul are authorized or obligated by law to close, with the same force and effect as if made on the date for such payment, and no interest shall be payable in respect of any such delay. We will pay interest to the person who is registered as the owner of a Note at the close of business on the fifteenth day (whether or not a business day) preceding such Interest Payment Date. Interest on the Notes will be computed on the basis of a 360-day year consisting of twelve 30-day months. We will make principal and interest payments on the Notes in immediately available funds in U.S. dollars.

The payment of interest and the repayment of principal on the Notes will not be guaranteed by the Government.

Denomination

The Notes will be issued in minimum denominations of US$200,000 principal amount and integral multiples of US$1,000 in excess thereof.

Redemption

We may not redeem the Notes prior to maturity. At maturity, we will redeem the Notes at par.

Form and Registration

We will issue the Notes in the form of one or more fully registered global notes, registered in the name of a nominee of and deposited with the custodian for DTC. Except as described in the accompanying prospectus

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under “Description of the Securities—Description of Debt Securities—Global Securities,” the global notes will not be exchangeable for Notes in definitive registered form, and will not be issued in definitive registered form. Financial institutions, acting as direct and indirect participants in DTC, will represent your beneficial interests in the global notes. These financial institutions will record the ownership and transfer of your beneficial interest through book-entry accounts. You may hold your beneficial interests in the Notes through Euroclear or Clearstream if you are a participant in such systems, or indirectly through organizations that are participants in such systems. Any secondary market trading of book-entry interests in the Notes will take place through DTC participants, including Euroclear and Clearstream. See “Clearance and Settlement—Transfers Within and Between DTC, Euroclear and Clearstream.”

The fiscal agent will not charge you any fees for the Notes, other than reasonable fees for the replacement of lost, stolen, mutilated or destroyed Notes. However, you may incur fees for the maintenance and operation of the book-entry accounts with the clearing systems in which your beneficial interests are held.

For so long as the Notes are listed on the SGX-ST and the rules of the SGX-ST so require, we will appoint and maintain a paying agent in Singapore, where the certificates representing the Notes may be presented or surrendered for payment or redemption (if required), in the event that we issue the Notes in definitive form in the limited circumstances set forth in the accompanying prospectus. In addition, an announcement of such issue will be made through the SGX-ST. Such announcement will include all material information with respect to the delivery of the definitive Notes, including details of the paying agent in Singapore.

Further Issues

We may from time to time, without the consent of the holders of the Notes, create and issue additional debt securities with the same terms and conditions as the Notes in all respects so that such further issue shall be consolidated and form a single series with the Notes. We will not issue any such additional debt securities unless such additional securities have no more than a de minimis amount of original issue discount or such issuance would otherwise constitute a “qualified reopening” for U.S. federal income tax purposes.

Notices

All notices regarding the Notes will be published in London in the Financial Times and in New York in The Wall Street Journal (U.S. Edition). If we cannot, for any reason, publish notice in any of those newspapers, we will choose an appropriate alternate English language newspaper of general circulation, and notice in that newspaper will be considered valid notice. Notice will be considered made on the first date of its publication.

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CLEARANCE AND SETTLEMENT

We have obtained the information in this section from sources we believe to be reliable, including DTC, Euroclear and Clearstream. We accept responsibility only for accurately extracting information from such sources. DTC, Euroclear and Clearstream are under no obligation to perform or continue to perform the procedures described below, and they may modify or discontinue them at any time. Neither we nor the registrar will be responsible for DTC’s, Euroclear’s or Clearstream’s performance of their obligations under their rules and procedures. Nor will we or the registrar be responsible for the performance by direct or indirect participants of their obligations under their rules and procedures.

Introduction

The Depository Trust Company

DTC is:

• a limited-purpose trust company organized under the New York Banking Law;

• a “banking organization” under the New York Banking Law;

• a member of the Federal Reserve System;

• a “clearing corporation” under the New York Uniform Commercial Code; and

• a “clearing agency” registered under Section 17A of the Securities Exchange Act of 1934.

DTC was created to hold securities for its participants and facilitate the clearance and settlement of securities transactions between its participants. It does this through electronic book-entry changes in the accounts of its direct participants, eliminating the need for physical movement of securities certificates.

Euroclear and Clearstream

Like DTC, Euroclear and Clearstream hold securities for their participants and facilitate the clearance and settlement of securities transactions between their participants through electronic book-entry changes in their accounts. Euroclear and Clearstream provide various services to their participants, including the safekeeping, administration, clearance and settlement and lending and borrowing of internationally traded securities. Participants in Euroclear and Clearstream are financial institutions such as underwriters, securities brokers and dealers, banks and trust companies. Some of the underwriters participating in this offering are participants in Euroclear or Clearstream. Other banks, brokers, dealers and trust companies have indirect access to Euroclear or Clearstream by clearing through or maintaining a custodial relationship with a Euroclear or Clearstream participant.

Ownership of the Notes through DTC, Euroclear and Clearstream

We will issue the Notes in the form of one or more fully registered global notes, registered in the name of a nominee of DTC. Financial institutions, acting as direct and indirect participants in DTC, will represent your beneficial interests in the Notes. These financial institutions will record the ownership and transfer of your beneficial interests through book-entry accounts. You may also hold your beneficial interests in the Notes through Euroclear or Clearstream, if you are a participant in such systems, or indirectly through organizations that are participants in such systems. Euroclear and Clearstream will hold their participants’ beneficial interests in the global notes in their customers’ securities accounts with their depositaries. These depositaries of Euroclear and Clearstream in turn will hold such interests in their customers’ securities accounts with DTC.

We and the fiscal agent generally will treat the registered holder of the Notes, initially Cede & Co., as the absolute owner of the Notes for all purposes. Once we and the fiscal agent make payments to the registered

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holder, we and the fiscal agent will no longer be liable on the Notes for the amounts so paid. Accordingly, if you own a beneficial interest in the global notes, you must rely on the procedures of the institutions through which you hold your interests in the Notes, including DTC, Euroclear, Clearstream and their respective participants, to exercise any of the rights granted to holders of the Notes. Under existing industry practice, if you desire to take any action that Cede & Co., as the holder of the global notes, is entitled to take, then Cede & Co. would authorize the DTC participant through which you own your beneficial interest to take such action. The participant would then either authorize you to take the action or act for you on your instructions.

DTC may grant proxies or authorize its participants, or persons holding beneficial interests in the Notes through such participants, to exercise any rights of a holder or take any actions that a holder is entitled to take under the fiscal agency agreement or the Notes. Euroclear’s or Clearstream’s ability to take actions as holder under the Notes or the fiscal agency agreement will be limited by the ability of their respective depositaries to carry out such actions for them through DTC. Euroclear and Clearstream will take such actions only in accordance with their respective rules and procedures.

Transfers Within and Between DTC, Euroclear and Clearstream

Trading Between DTC Purchasers and Sellers

DTC participants will transfer interests in the Notes among themselves in the ordinary way according to DTC rules. Participants will pay for such transfers by wire transfer. The laws of some states require certain purchasers of securities to take physical delivery of the securities in definitive form. These laws may impair your ability to transfer beneficial interests in the global notes to such purchasers. DTC can act only on behalf of its direct participants, who in turn act on behalf of indirect participants and certain banks. Thus, your ability to pledge a beneficial interest in the global notes to persons that do not participate in the DTC system, and to take other actions, may be limited because you will not possess a physical certificate that represents your interest.

Trading Between Euroclear and/or Clearstream Participants

Participants in Euroclear and Clearstream will transfer interests in the Notes among themselves according to the rules and operating procedures of Euroclear and Clearstream.

Trading Between a DTC Seller and a Euroclear or Clearstream Purchaser

When the Notes are to be transferred from the account of a DTC participant to the account of a Euroclear or Clearstream participant, the purchaser must first send instructions to Euroclear or Clearstream through a participant at least one business day prior to the settlement date. Euroclear or Clearstream will then instruct its depositary to receive the Notes and make payment for them. On the settlement date, the depositary will make payment to the DTC participant’s account, and the Notes will be credited to the depositary’s account. After settlement has been completed, DTC will credit the Notes to Euroclear or Clearstream, Euroclear or Clearstream will credit the Notes, in accordance with its usual procedures, to the participant’s account, and the participant will then credit the purchaser’s account. These securities credits will appear the next day (European time) after the settlement date. The cash debit from the account of Euroclear or Clearstream will be back-valued to the value date, which will be the preceding day if settlement occurs in New York. If settlement is not completed on the intended value date (i.e., the trade fails), the cash debit will instead be valued at the actual settlement date.

Participants in Euroclear and Clearstream will need to make funds available to Euroclear or Clearstream to pay for the Notes by wire transfer on the value date. The most direct way of doing this is to pre-position funds (i.e., have funds in place at Euroclear or Clearstream before the value date), either from cash on hand or existing lines of credit. Under this approach, however, participants may take on credit exposure to Euroclear and Clearstream until the Notes are credited to their accounts one day later.

As an alternative, if Euroclear or Clearstream has extended a line of credit to a participant, the participant may decide not to pre-position funds, but to allow Euroclear or Clearstream to draw on the line of credit to

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finance settlement for the Notes. Under this procedure, Euroclear or Clearstream would charge the participant overdraft charges for one day, assuming that the overdraft would be cleared when the Notes were credited to the participant’s account. However, interest on the Notes would accrue from the value date. Therefore, in many cases the interest income on the Notes which the participant earns during that one-day period will substantially reduce or offset the amount of the participant’s overdraft charges. Of course, this result will depend on the cost of funds (i.e., the interest rate that Euroclear or Clearstream charges) to each participant.

Since the settlement will occur during New York business hours, a DTC participant selling an interest in the Notes can use its usual procedures for transferring global securities to the depositories of Euroclear or Clearstream for the benefit of Euroclear or Clearstream participants. The DTC seller will receive the sale proceeds on the settlement date. Thus, to the DTC seller, a cross-market sale will settle no differently than a trade between two DTC participants.

Finally, day traders who use Euroclear or Clearstream and who purchase Notes from DTC participants for credit to Euroclear participants or Clearstream participants should note that these trades will automatically fail unless one of three steps is taken:

• borrowing through Euroclear or Clearstream for one day, until the purchase side of the day trade is reflected in the day trader’s Euroclear or Clearstream account, in accordance with the clearing system’s customary procedures;

• borrowing the Notes in the United States from DTC participants no later than one day prior to settlement, which would allow sufficient time for the Notes to be reflected in the Euroclear or Clearstream account in order to settle the sale side of the trade; or

• staggering the value dates for the buy and sell sides of the trade so that the value date for the purchase from the DTC participant is at least one day prior to the value date for the sale to the Euroclear or Clearstream participant.

Trading Between a Euroclear or Clearstream Seller and a DTC Purchaser

Due to time-zone differences in their favor, Euroclear and Clearstream participants can use their usual procedures to transfer Notes through their depositaries to a DTC participant. The seller must first send instructions to Euroclear or Clearstream through a participant at least one business day prior to the settlement date. Euroclear or Clearstream will then instruct its depositary to credit the Notes to the DTC participant’s account and receive payment. The payment will be credited in the account of the Euroclear or Clearstream participant on the following day, but the receipt of the cash proceeds will be back-valued to the value date, which will be the preceding day if settlement occurs in New York. If settlement is not completed on the intended value date (i.e., the trade fails), the receipt of the cash proceeds will instead be valued at the actual settlement date.

If the Euroclear or Clearstream participant selling the Notes has a line of credit with Euroclear or Clearstream and elects to be in debit for the Notes until it receives the sale proceeds in its account, then the back-valuation may substantially reduce or offset any overdraft charges that the participant incurs over that period.

Settlement in other currencies between DTC and Euroclear and Clearstream is possible using free-of-payment transfers to move the Notes, but funds movement will take place separately.

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TAXATION

Korean Taxation

For a discussion of certain Korean tax considerations that may be relevant to you if you invest in the Notes, see “Taxation—Korean Taxation” in the accompanying prospectus.

United States Tax Considerations

Stated interest on the Notes will be treated as qualified stated interest for U.S. federal income tax purposes. Under certain circumstances as described under “Taxation—Korean Taxation” in the accompanying prospectus, a U.S. holder may be subject to Korean withholding tax upon the sale or other disposition of Notes. A U.S. holder eligible for benefits of the Korea-U.S. tax treaty, which exempts capital gains from tax in Korea, would not be eligible to credit against its U.S. federal income tax liability any such Korean tax withheld. U.S. holders should consult their own tax advisers with respect to their eligibility for benefits under the Korea-U.S. tax treaty and, in the case of U.S. holders that are not eligible for treaty benefits, their ability to credit any Korean tax withheld upon sale of the Notes against their U.S. federal income tax liability. For a discussion of additional U.S. federal income tax considerations that may be relevant to you if you invest in the Notes and are a U.S. holder, see “Taxation—United States Tax Considerations” in the accompanying prospectus.

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UNDERWRITING

Relationship with the Underwriters

We and the underwriters named below (the “Underwriters”) have entered into a Terms Agreement dated May             , 2015 (the “Terms Agreement”) with respect to the Notes relating to the Underwriting Agreement— Standard Terms (together with the Terms Agreement, the “Underwriting Agreement”) filed as an exhibit to the registration statement. Barclays Bank PLC, Citigroup Global Markets Inc., Credit Suisse Securities (USA) LLC, Goldman Sachs International, The Hongkong and Shanghai Banking Corporation Limited, KDB Asia Limited and SG Americas Securities, LLC are acting as representatives of the Underwriters. Subject to the terms and conditions set forth in the Underwriting Agreement, we have agreed to sell to each of the Underwriters, severally and not jointly, and each of the Underwriters has, severally and not jointly, agreed to purchase, the following principal amount of the Notes set out opposite its name below:

Name of Underwriters	Principal Amount of the Notes
Barclays Bank PLC	US$
Citigroup Global Markets Inc.
Credit Suisse Securities (USA) LLC
Goldman Sachs International
The Hongkong and Shanghai Banking Corporation Limited
KDB Asia Limited
SG Americas Securities, LLC
	US$

KDB Asia Limited, one of the underwriters, is our affiliate and has agreed to offer and sell the Notes only outside the United States to non-U.S. persons.

Under the terms and conditions of the Underwriting Agreement, if the Underwriters take any of the Notes, then the Underwriters are obligated to take and pay for all of the Notes.

The Underwriters initially propose to offer the Notes directly to the public at the offering price described on the cover page of this prospectus supplement. After the initial offering of the Notes, the Underwriters may from time to time vary the offering price and other selling terms.

If a jurisdiction requires that the offering be made by a licensed broker or dealer and the Underwriters or any affiliate of the Underwriters is a licensed broker or dealer in that jurisdiction, the offering shall be deemed to be made by that Underwriter or its affiliate on our behalf in such jurisdiction.

The Notes are a new class of securities with no established trading market. Application will be made to the SGX-ST for the listing and quotation of the Notes. The Underwriters have advised us that they intend to make a market in the Notes. However, they are not obligated to do so and they may discontinue any market making activities with respect to the Notes at any time without notice. Accordingly, we cannot assure you as to the liquidity of any trading market for the Notes.

We have agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act of 1933, as amended, or to contribute to payments which the Underwriters may be required to make in respect of any such liabilities.

The amount of net proceeds from our Notes is US$             after deducting underwriting discounts but not estimated expenses. Expenses associated with the Notes offering are estimated to be US$200,000. The Underwriters have agreed to pay certain of our expenses incurred in connection with the offering of the Notes.

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The Underwriters and certain of their affiliates may have performed certain commercial banking, investment banking and advisory services for us and/or our affiliates from time to time for which they have received customary fees and expenses and may, from time to time, engage in transactions with and perform services for us and/or our affiliates in the ordinary course of their business.

The Underwriters or certain of their affiliates may purchase Notes and be allocated Notes for asset management and/or proprietary purposes but not with a view to distribution. The Underwriters or their respective affiliates may purchase Notes for its or their own account and enter into transactions, including credit derivatives, such as asset swaps, repackaging and credit default swaps relating to Notes and/or other securities of us or our subsidiaries or affiliates at the same time as the offer and sale of Notes or in secondary market transactions. Such transactions would be carried out as bilateral trades with selected counterparties and separately from any existing sale or resale of Notes to which this prospectus supplement relates (notwithstanding that such selected counterparties may also be purchasers of Notes).

Delivery of the Notes

We expect to make delivery of the Notes, against payment in same-day funds on or about May             , 2015, which we expect will be the fifth business day following the date of this prospectus supplement. Under Rule 15c6-1 promulgated under the Securities Exchange Act of 1934, as amended, U.S. purchasers are generally required to settle trades in the secondary market in three business days, unless they and the other parties to any such trade expressly agree otherwise. Accordingly, if you wish to trade in the Notes on the date of this prospectus supplement or the next succeeding business day, because the Notes will initially settle in T+5, you may be required to specify an alternate settlement cycle at the time of your trade to prevent a failed settlement. Purchasers in other countries should consult with their own advisors.

Foreign Selling Restrictions

Each Underwriter has agreed, severally and not jointly, to the following selling restrictions in connection with the offering with respect to the following jurisdictions:

Korea

Each Underwriter has severally represented and agreed that (i) it has not offered, sold or delivered and will not offer, sell or deliver, directly or indirectly, any Notes in Korea, or to, or for the account or benefit of, any resident of Korea, except as otherwise permitted by applicable Korean laws and regulations, and (ii) any securities dealer to whom the Underwriters may sell the Notes will agree that it will not offer any Notes, directly or indirectly, in Korea, or to any resident of Korea, except as permitted by applicable Korean laws and regulations, or to any other dealer who does not so represent and agree.

United Kingdom

Each Underwriter has severally represented and agreed that (i) it has only communicated or caused to be communicated and will only communicate or cause to be communicated any invitation or inducement to engage in investment activity (within the meaning of Section 21 of the Financial Services and Markets Act of 2000 (the “FSMA”)) received by it in connection with the issue or sale of any of the Notes in circumstances in which section 21(1) of the FSMA does not apply to us, and (ii) it has complied, and will comply with, all applicable provisions of the FSMA with respect to anything done by it in relation to the Notes, from or otherwise involving the United Kingdom.

Japan

Each Underwriter has severally represented and agreed that the Notes have not been and will not be registered under the Financial Instruments and Exchange Law of Japan (Law No. 25 of 1948, as amended); it has not offered or sold, and it will not offer or sell, directly or indirectly, any of the Notes in Japan or to, or for the

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account or benefit of, any resident of Japan or to, or for the account or benefit of, any resident for reoffering or resale, directly or indirectly, in Japan or to, or for the account or benefit of, any resident of Japan except (i) pursuant to an exemption from the registration requirements of, or otherwise in compliance with, the Financial Instruments and Exchange Law of Japan, and (ii) in compliance with the other relevant laws of Japan.

Hong Kong

Each Underwriter has severally represented and agreed that:

• it has not offered or sold and will not offer or sell in Hong Kong, by means of any document, any Notes other than (i) to “professional investors” as defined in the Securities and Futures Ordinance (Cap. 571 of the Laws of Hong Kong) (the “SFO”) and any rules made under the SFO; or (ii) in other circumstances which do not result in the document being a “prospectus” as defined in the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap. 32 of the Laws of Hong Kong) (the “Companies Ordinance”) or which do not constitute an offer to the public within the meaning of the Companies Ordinance; and

• it has not issued, or had in its possession for the purposes of issue, and will not issue or have in its possession for the purposes of issue, any advertisement, invitation or document relating to the Notes, whether in Hong Kong or elsewhere, which is directed at, or the contents of which are or are likely to be accessed or read by, the public in Hong Kong (except if permitted to do so under the securities laws of Hong Kong) other than with respect to Notes which are or are intended to be disposed of only to persons outside Hong Kong or only to “professional investors” as defined in the SFO and any rules made thereunder.

Singapore

Each Underwriter has severally represented and agreed that neither the preliminary prospectus nor the prospectus has been registered as a prospectus with the Monetary Authority of Singapore under the Securities and Futures Act (Chapter 289 of Singapore)(the “SFA”). Accordingly, each Underwriter has severally represented, warranted and agreed that it has not offered or sold any Notes or caused the Notes to be made the subject of an invitation for subscription or purchase and will not offer or sell any Notes or cause the Notes to be made the subject of an invitation for subscription or purchase, and has not circulated or distributed, nor will it circulate or distribute, the preliminary prospectus or the prospectus or any other document or material in connection with the offer or sale, or invitation for subscription or purchase, of the Notes, whether directly or indirectly, to any person in Singapore other than under exemptions provided in the SFA for offers made (i) to an institutional investor (as defined in Section 4A of the SFA) pursuant to Section 274 of the SFA, (ii) to a relevant person pursuant to Section 275(1) of the SFA, or any person pursuant to an offer referred to in Section 275(1A) of the SFA, and in accordance with the conditions specified in Section 275 of the SFA or (iii) otherwise pursuant to, and in accordance with the conditions of, any other applicable provision of the SFA.

Where the Notes are acquired by persons who are relevant persons specified in Section 275 of the SFA, namely:

(a) a corporation (which is not an accredited investor (as defined in Section 4A of the SFA)) the sole business of which is to hold investments and the entire share capital of which is owned by one or more individuals, each of whom is an accredited investor; or

(b) a trust (where the trustee is not an accredited investor) whose sole purpose is to hold investments and each beneficiary of the trust is an individual who is an accredited investor,

securities (as defined in Section 239(1) of the SFA) of that corporation or the beneficiaries’ rights and interest (howsoever described) in that trust shall not be transferred within 6 months after that corporation or that trust has acquired the Notes pursuant to an offer made under Section 275 of the SFA except:

(1) to an institutional investor or to a relevant person defined in Section 275(2) of the SFA, or any person arising from an offer referred to in Section 275(1A) or Section 276(4)(i)(B) of the SFA;

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(2) where no consideration is or will be given for the transfer;

(3) where the transfer is by operation of law;

(4) as specified in Section 276(7) of the SFA; or

(5) as specified in Regulation 32 of the Securities and Futures (Offers of Investments) (Shares and Debentures) Regulations 2005 of Singapore.

Australia

No prospectus or other disclosure document (as defined in the Corporations Act 2001 of Australia) in relation to the offering of the Notes has been or will be lodged with or registered by Australian Securities and Investments Commission or the Australian Securities Exchange Limited. Each Underwriter has represented and agreed that it has not:

(a) made or invited, and will not make or invite, an offer of the Notes for issue or sale in Australia (including an offer or invitation which is received by a person in Australia); and

(b) distributed or published and will not distribute or publish any draft, preliminary or final form offering memorandum, advertisement or other offering material relating to the Notes in Australia,

unless:

(i) the minimum aggregate consideration payable by each offeree is at least AUD 500,000 (or its equivalent in an alternate currency) (disregarding money lent by the Offeror or its associates) or the offer otherwise does not require disclosure to investors in accordance with Part 6D.2 and Part 7 of the Corporations Act 2001 of Australia; and

(ii) such action complies with all applicable laws, directives and regulations and does not require any document to be lodged with, or registered by, the Australian Securities and Investments Commission.

Each Underwriter has agreed that it will not sell the Notes in circumstances where employees of the Underwriter aware of, or involved in, the sale know, or have reasonable grounds to suspect, that the Notes, or an interest in or right in respect of the Notes, was being, or would later be, acquired either directly or indirectly by a resident of Australia, or a non-resident who is engaged in carrying on business in Australia at or through a permanent establishment of that non-resident in Australia (the expressions “resident of Australia”, “non-resident” and “permanent establishment” having the meanings given to them by the Australian Tax Act).

Price Stabilization and Short Position

In connection with this offering, Barclays Bank PLC (the “Stabilizing Manager”) or any person acting for it, on behalf of the Underwriters, may purchase and sell the Notes in the open market. These transactions may include over-allotment, covering transactions, penalty bids and stabilizing transactions. Over-allotment involves sales of the Notes in excess of the principal amount of Notes to be purchased by the Underwriters in this offering, which creates a short position for the Underwriters. Covering transactions involve purchases of the Notes in the open market after the distribution has been completed in order to cover short positions. A penalty bid occurs when a particular Underwriter repays to the Underwriters a portion of the underwriting discount received by it because the Underwriters or the Stabilizing Manager has repurchased Notes sold by or for the account of such Underwriter in stabilizing or short covering transactions. Stabilizing transactions consist of certain bids or purchases of Notes in the open market for the purpose of preventing or retarding a decline in the market price of the Notes while the offering is in progress. Any of these activities may have the effect of preventing or retarding a decline in the market price of the Notes. They may also cause the price of the Notes to be higher than the price that otherwise would exist in the open market in the absence of these transactions. The Stabilizing Manager may conduct these transactions in the over-the-counter market or otherwise. If the Stabilizing Manager commences any of these transactions, it may discontinue them at any time, and must discontinue them after a limited period.

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LEGAL MATTERS

The validity of the Notes is being passed upon for us by Cleary Gottlieb Steen & Hamilton LLP, New York, New York, and by Hwang Mok Park P.C., Seoul, Korea. Certain legal matters will also be passed upon for the Underwriters by Davis Polk & Wardwell LLP, New York, New York. In giving their opinions, Cleary Gottlieb Steen & Hamilton LLP and Davis Polk & Wardwell LLP may rely as to matters of Korean law upon the opinions of Hwang Mok Park P.C., and Hwang Mok Park P.C. may rely as to matters of New York law upon the opinions of Cleary Gottlieb Steen & Hamilton LLP.

OFFICIAL STATEMENTS AND DOCUMENTS

Our Chief Executive Officer and Chairman of the Board of Directors, in his official capacity, has supplied the information set forth in this prospectus supplement under “Recent Developments—The Korea Development Bank.” Such information is stated on his authority. The documents identified in the portion of this prospectus supplement captioned “Recent Developments—The Republic of Korea” as the sources of financial or statistical data are derived from official public documents of the Republic and of its agencies and instrumentalities.

GENERAL INFORMATION

We were established in 1954 as a government-owned financial institution pursuant to The Korea Development Bank Act, as amended. The address of our registered office is 14, Eunhaeng-ro, Youngdeungpo-gu, Seoul 150-973, The Republic of Korea.

Our Board of Directors can be reached at the address of our registered office: c/o 14, Eunhaeng-ro, Youngdeungpo-gu, Seoul 150-973, The Republic of Korea.

The issue of the Notes has been authorized by a resolution of our Board of Directors passed on December 5, 2014 and a decision of our Chief Executive Officer and Chairman of the Board of Directors dated May 7, 2015. On May 8, 2015, we filed our reports on the proposed issuance of the Notes with the Ministry of Strategy and Finance of Korea.

The registration statement with respect to us and the Notes has been filed with the U.S. Securities and Exchange Commission in Washington, D.C. under the Securities Act of 1933, as amended. Additional information concerning us and the Notes is contained in the registration statement and post-effective amendments to such registration statement, including their various exhibits, which may be inspected at the public reference facilities maintained by the Securities and Exchange Commission at Room 1580, 100 F Street N.E., Washington, D.C. 20549, United States.

The Notes have been accepted for clearance through DTC, Euroclear and Clearstream:

	ISIN	CUSIP
Notes

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PROSPECTUS

$7,097,380,000

The Korea Development Bank

Debt Securities

Warrants to Purchase Debt Securities

Guarantees

The Republic of Korea

Guarantees

We will provide the specific terms of these securities in supplements to this prospectus. You should read this prospectus and any prospectus supplement carefully before you invest.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

This prospectus is dated May 7, 2015

TABLE OF CONTENTS

	Page
CERTAIN DEFINED TERMS AND CONVENTIONS		1
USE OF PROCEEDS		2
THE KOREA DEVELOPMENT BANK		3
Overview		3
Capitalization		7
Business		7
Selected Financial Statement Data		9
Operations		15
Sources of Funds		22
Debt		24
Overseas Operations		25
Property		26
Directors and Management; Employees		26
Tables and Supplementary Information		27
Financial Statements and the Auditors		32
THE REPUBLIC OF KOREA		152
Land and History		152
Government and Politics		154
The Economy		158
Principal Sectors of the Economy		165
The Financial System		172
Monetary Policy		177
Balance of Payments and Foreign Trade		181
Government Finance		188
Debt		190
Tables and Supplementary Information		192
DESCRIPTION OF THE SECURITIES		196
Description of Debt Securities		196
Description of Warrants		203
Terms Applicable to Debt Securities and Warrants		203
Description of Guarantees to be Issued by Us		204
Description of Guarantees to be Issued by The Republic of Korea		205
LIMITATIONS ON ISSUANCE OF BEARER DEBT SECURITIES AND BEARER WARRANTS		206
TAXATION		207
Korean Taxation		207
United States Tax Considerations		209
PLAN OF DISTRIBUTION		216
LEGAL MATTERS		217
AUTHORIZED REPRESENTATIVES IN THE UNITED STATES		217
OFFICIAL STATEMENTS AND DOCUMENTS		217
EXPERTS		217
FORWARD-LOOKING STATEMENTS		218
FURTHER INFORMATION		220

i

CERTAIN DEFINED TERMS AND CONVENTIONS

All references to the “Bank”, “we”, “our” or “us” mean The Korea Development Bank. All references to “Korea” or the “Republic” contained in this prospectus mean The Republic of Korea. All references to the “Government” mean the government of Korea.

Unless otherwise indicated, all references to “won”, “Won” or “W” contained in this prospectus are to the currency of Korea, references to “U.S. dollars”, “Dollars”, “$”, “USD” or “US$” are to the currency of the United States of America, references to “Euro”, “EUR” or “€” are to the currency of the European Union, references to “Japanese yen”, “JPY” or “¥” are to the currency of Japan, references to “Singapore dollar” or “SGD” are to the currency of Singapore, references to “Swiss franc” or “CHF” are to the currency of Switzerland, references to “pound sterling”, “GBP” or “£” are to the currency of the United Kingdom, references to “Chinese offshore renminbi” or “CNH” are to the currency of the People’s Republic of China traded outside of mainland China, references to “Hong Kong dollar” or “HKD” are to the currency of Hong Kong, S.A.R., references to “Malaysian ringgit” or “MYR” are to the currency of Malaysia, references to “Indian rupee” or “INR” are to the currency of India, references to “Thai baht” or “THB” are to the currency of Thailand, references to “Australian dollar” or “AUD” are to the currency of Australia, references to “Norwegian krone” or “NOK” are to the currency of Norway and references to “Brazilian real” or “BRL” are to the currency of the Federative Republic of Brazil.

All discrepancies in any table between totals and the sums of the amounts listed are due to rounding.

Our separate financial information as of and for the years ended December 31, 2013 and 2014 included in this prospectus has been prepared in accordance with International Financial Reporting Standards as adopted in Korea (“Korean IFRS” or “K-IFRS”). References in this prospectus to “separate” financial statements and information are to financial statements and information prepared on a non-consolidated basis. Unless specified otherwise, our financial and other information included in this prospectus is presented on a separate basis in accordance with Korean IFRS and does not include such information with respect to our subsidiaries. KDB Financial Group (or KDBFG), a financial holding company, and Korea Finance Corporation (or KoFC), a public policy financing vehicle and the parent company of KDBFG, both of which had originally been established by spinning off a portion of our assets, liabilities and equity in October 2009, merged with and into us on December 31, 2014. Note 47 of the notes to our separate financial statements as of and for the years ended December 31, 2013 and 2014 included in this prospectus provides information regarding the merger and the amounts of assets and liabilities acquired by us in connection with the merger.

1

USE OF PROCEEDS

Unless otherwise specified in the applicable prospectus supplement, we will use the net proceeds from the sale of the securities for our general operations.

2

THE KOREA DEVELOPMENT BANK

Overview

We were established in 1954 as a government-owned financial institution pursuant to The Korea Development Bank Act, as amended (the “KDB Act”). Since our establishment, we have been the leading bank in the Republic with respect to the provision of long-term financing for projects designed to assist the nation’s economic growth and development. The Government directly owns all of our paid-in capital. Our registered office is located at 14, Eunhaeng-ro, Youngdeungpo-gu, Seoul, The Republic of Korea.

In June 2008, the Financial Services Commission announced the Government’s preliminary plan for our privatization and, in May 2009, the KDB Act was amended to facilitate our privatization. The preliminary plan reflected the Government’s intention to nurture a more competitive corporate and investment banking sector and trigger reorganization and further advancement of the Korean financial industry.

To implement our privatization, the Government established KDB Financial Group, or KDBFG, a financial holding company, and Korea Finance Corporation, or KoFC, a public policy financing vehicle, in October 2009, by spinning off a portion of our assets, liabilities and equity. In the spin-off, our interests in Daewoo Securities Co., Ltd., KDB Asset Management Co., Ltd. and KDB Capital Corp. were transferred to KDBFG, and our equity holdings in certain government-controlled companies, including Korea Electric Power Corporation, or KEPCO, and certain companies under restructuring programs, including Hyundai Engineering & Construction Co., Ltd., were transferred to KoFC. The Government transferred its ownership interest in us to KDBFG in exchange for all of KDBFG’s share capital on November 24, 2009.

The following diagram shows our ownership structure before and after the spin-off and the share transfer.

In April 2013, in light of continued uncertainties surrounding the global economy and the prolonged effects of the global financial crisis that commenced in the second half of 2008 on the Korean economy, as well as certain overlap of financial policy roles among different Government-owned banks and financial corporations, the Government launched a task force (the “Task Force”) to consider the reorganization of the financial policy roles of Government-owned banks and financial corporations, including the Government’s plan for our privatization. The Task Force, composed of representatives from various government branches responsible for overseeing such Government-owned entities as well as members of the academia, held a series of closed meetings, considered various reorganization options with respect to policy financing functions and reported their findings to the Financial Services Commission. In August 2013, pursuant to the findings of the Task Force, the Financial Services Commission announced the Government’s plan to reorganize Government-owned policy banks and financial corporations in order to streamline their overlapping functions and reinforce their policy financing roles for start-ups and small- and medium-sized enterprises, new growth industries and overseas projects. The plan called for, among other things, (i) the merger of KoFC and KDBFG into us and the transfer of

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KoFC’s overseas assets of approximately W2 trillion to The Export-Import Bank of Korea, or KEXIM, (ii) the sale of our subsidiaries that do not have policy financing roles and (iii) the gradual reduction of our retail banking services.

In May 2014, the National Assembly amended the KDB Act to largely reflect the plan announced by the Financial Services Commission and halt our privatization and streamline the financial policy roles among Government-owned banks and financial corporations in order to better respond systematically to rapidly changing domestic and international economic conditions. Under the amended KDB Act, which was amended in May 2014, the public policy financing role was consolidated and strengthened, and KDBFG and KoFC (together with its subsidiaries) were merged into us on December 31, 2014 in order to utilize our rich experience and expertise in public policy financing, and we took over KoFC’s role of providing public policy financial support to Korean companies, including managing and operating the Financial Market Stabilization Fund established pursuant to the Act on the Structural Improvement of the Financial Industry enacted in 2009, while KoFC’s overseas assets of approximately W2 trillion were transferred to KEXIM. On December 31, 2014, the Government transferred all of its ownership interest in KoFC and KDBFG to us and in return received 3,036,079,768 new shares of us with an aggregate par value of W15,180.4 billion. As a newly merged entity, we have an authorized share capital of up to W30,000 billion and our paid-in capital was W15,180.4 billion. As of the date of this prospectus, the Government owns 100% of our share capital.

The following diagram shows our ownership structure before and after the merger was effected under the amended KDB Act. Our ownership structure returned to our original ownership structure that existed prior to the spin-off and reorganization in October 2009.

While the Government has halted its plan for our privatization, it has expressed its intention to privatize our subsidiaries that do not have policy financing roles, subject to market conditions.

Our primary purpose, as stated in the KDB Act, the KDB Decree and our Articles of Incorporation, is to “furnish funds in order to expedite the development of the national economy.” We make loans available to major industries for equipment, capital investment and the development of high technology, as well as for working capital.

As of December 31, 2014, we had W136,760.1 billion of loans outstanding (including loans, call loans, domestic usance, bills of exchange bought, local letters of credit negotiation and loan-type suspense accounts pursuant to the applicable guidelines without adjusting for allowance for possible loan losses, present value discounts and deferred loan fees), total assets of W217,833.2 billion and total equity of W25,412.6 billion, as compared to W98,119.8 billion of loans outstanding, W143,607.5 billion of total assets and W16,346.1 billion of total equity as of December 31, 2013. In 2014, we recorded interest income of W4,750.4 billion, interest expense of W2,761.9 billion and net income of W183.5 billion, as compared to W4,766.6 billion of interest income, W3,036.1 billion of interest expense and W1,447.4 billion of net loss in 2013. See “—Selected Financial Statement Data.”

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Currently, the Government directly holds all of our paid-in capital. In addition to contributions to our capital, the Government provides direct financial support for our financing activities, in the form of loans or guarantees. The Government has the power to elect or dismiss our Chairman and Chief Executive Officer, members of our Board of Directors and Auditor. Pursuant to the KDB Act, the Financial Services Commission has supervisory power and authority over matters relating to our general business including, but not limited to, capital adequacy and managerial soundness.

The Government supports our operations pursuant to Article 32 of the KDB Act. Article 32 provides that “the annual net losses of the Korea Development Bank shall be offset each year by the reserve, and if the reserve be insufficient, the deficit shall be replenished by the Government.” As a result of the KDB Act, the Government is generally responsible for our operations and is legally obligated to replenish any deficit that arises if our reserve, consisting of our surplus and capital surplus items, is insufficient to cover our annual net losses. In light of the above, if we had insufficient funds to make any payment under any of our obligations, including the debt securities and guarantees covered by this prospectus, the Government would take appropriate steps, such as by making a capital contribution, by allocating funds or by taking other action, to enable us to make such payment when due. The provisions of Article 32 do not, however, constitute a direct guarantee by the Government of our obligations under the debt securities or the guarantees, and the provisions of the KDB Act, including Article 32, may be amended at any time by action of the National Assembly.

In January 1998, the Government amended the KDB Act to:

• subordinate our borrowings from the Government to other indebtedness incurred in our operations;

• allow the Government to offset any deficit that arises if our reserve fails to cover our annual net losses by transferring Government-owned property, including securities held by the Government, to us; and

• allow direct injections of capital by the Government without prior National Assembly approval.

The Government amended the KDB Act in May 1999 and the KDB Decree in March 2000, to allow the Financial Services Commission to supervise and regulate us in terms of capital adequacy and managerial soundness.

In March 2002, the Government amended the KDB Act to enable us, among other things, to:

• obtain low-cost funds from The Bank of Korea and from the issuance of debt securities (in addition to already permitted Industrial Finance Bonds), which funds may be used for increased levels of lending to small and medium size enterprises;

• broaden the scope of borrowers to which we may extend working capital loans to include companies in the manufacturing industry, enterprises which are “closely related” to enhancing the corporate competitiveness of the manufacturing industry and leading-edge high-tech companies; and

• extend credits to mergers and acquisitions projects intended to facilitate corporate restructuring efforts.

In July 2005 and May 2009, the Government amended Article 43 of the KDB Act. The revised Article 43 provides that:

(1) our annual net profit, after adequate allowances are made for depreciation in assets, shall be distributed as follows:

(i) forty percent or more of the net profit shall be credited to reserve, until the reserve amounts equal the total amount of paid-in capital; and

(ii) any net profit remaining following the apportionment required under subparagraph (i) above shall be distributed in accordance with the resolution of our Board of Directors and the approval of our shareholders;

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(2) accumulated amounts in reserve may be capitalized; and

(3) any distributions made in accordance with paragraph (1)(ii) above may be in the form of cash dividends or dividends in kind, provided that any distributions of dividends in kind must be made in accordance with applicable provisions of the KDB Decree.

In February 2008, the Government further amended the KDB Act, primarily to transfer most of the Government’s supervisory authority over us from the Ministry of Strategy and Finance (formerly the Ministry of Finance and Economy) to the Financial Services Commission.

In May 2009, the Government amended the KDB Act to facilitate our privatization. The amendment provided for, among others:

• the preparation for the transformation of us from a special statutory entity into a corporation, including the application of the Banking Act as applicable;

• the expansion of our operation scope that enables us to engage in commercial banking activities, including retail banking;

• the provision of government guarantees for our mid-to-long term foreign currency debt outstanding at the time of initial sale of the Government’s stake in KDBFG (subject to the National Assembly’s authorization of the Government guarantee amount) and possible guarantees for our foreign currency debt incurred for the refinancing of such mid-to-long term foreign currency debt with the government guarantee during the period when the Government owns more than 50% of our shares; and

• the establishment of KDBFG and KoFC and application of the Financial Holding Company Act to KDBFG.

In May 2014, the Government and the National Assembly amended the KDB Act to streamline the financial policy roles among Government-owned banks and financial corporations in order to better respond systematically to rapidly changing domestic and international economic conditions by merging KDBFG and KoFC into us. The amended KDB Act provides, among others, that:

• the Government will halt its plan for our privatization;

• public policy financing will be consolidated and strengthened through the newly merged entity;

• we will comprehensively succeed to the properties, rights and obligations of KDBFG and KoFC upon the consummation of the merger;

• the bonds issued by KDBFG and the policy bank bonds issued by the KoFC shall be deemed as the industrial financial bonds issued by us;

• the business engaged in by KoFC in accordance with the Korea Finance Corporation Act or other laws and decrees will be continuously performed by us; and

• the repayment of the principal of and interest on foreign currency debt (with an original maturity of one year or more at the time of issuance) incurred by KoFC and us before this amended KDB Act comes into force shall be guaranteed by the Government at the time of initial sale by the Government of its equity interest in us, subject to the approval by the National Assembly.

Under the amended KDB Act, each of Article 43 and Article 44 was restated as Article 31 and Article 32, respectively, without any amendment.

The Minister of Strategy and Finance of the Republic has, on behalf of the Republic, signed the registration statement of which this prospectus forms a part.

6

Capitalization

As of December 31, 2014, our authorized capital was W30,000 billion and capitalization was as follows:

	December  31, 2014(1)
	(billions of won)
Long-term debt:
Won currency borrowings	W	4,074.2
Industrial finance bonds		89,591.2
Foreign currency borrowings		6,215.4
Total long-term debt		99,880.8	(2)(3)
Capital:
Paid-in capital		15,180.4
Capital surplus		2,522.9
Capital adjustments		—
Retained earnings(4)		6,890.9
Accumulated other comprehensive income		818.4
Total capital		25,412.6
Total capitalization	W	125,293.4

(1) Except as disclosed in this prospectus, there has been no material adverse change in our capitalization since December 31, 2014.

(2) We have translated borrowings in foreign currencies into Won at the rate of W1,099.2 to US$1.00, which was the market average exchange rate, as announced by the Seoul Monetary Brokerage Services Ltd., on December 31, 2014.

(3) As of December 31, 2014, we had contingent liabilities totaling W8,286.7 billion under outstanding guarantees issued on behalf of our clients.

(4) Includes regulatory reserve for bad loans of W1,306.9 billion as of December 31, 2014. If our provision for bad loans is deemed insufficient for regulatory purposes, we compensate for the difference by recording a regulatory reserve for bad loans, which is shown as a separate item included in retained earnings.

Business

Purpose and Authority

Since our establishment, we have been the leading bank in the Republic in providing long-term financing for projects designed to assist the nation’s economic growth and development.

Under the KDB Act, the KDB Decree and our Articles of Incorporation, our primary purpose is to “contribute to the sound development of the financial industry and the national economy by supplying and managing funds necessary for the development and promotion of industries, expansion of social infrastructure, development of regions, stabilization of the financial markets and facilitation of sustainable growth.” Since we serve the public policy objectives of the Government, we do not seek to maximize profits. We do, however, strive to maintain a level of profitability to strengthen our equity base and support growth in the volume of our business.

Under the KDB Act, we may:

• carry out activities necessary to accomplish the expansion of the national economy, subject to the approval of the Financial Services Commission;

• provide loans or discount notes;

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• subscribe to, underwrite or invest in securities;

• guarantee or assume indebtedness;

• raise funds by accepting demand deposits and time and savings deposits from the general public, issuing securities, borrowing from the Government, The Bank of Korea or other financial institutions, and borrowing from overseas;

• execute foreign exchange transactions, including currency and interest swap transactions;

• provide planning, management, research and other support services at the request of the Government, public bodies, financial institutions or enterprises; and

• carry out other businesses incidental to the foregoing (subject to the approval of the Financial Services Commission).

Government Support and Supervision

The Government owns directly all of our paid-in capital. On February 20, 2000, the Government contributed W100 billion in cash to our capital. On December 29, 2000, we reduced our paid-in capital by W959.8 billion to offset our expected net loss for the year. To compensate for the resulting deficit under the KDB Act, on June 20, 2001, the Government contributed W3 trillion in the form of shares of common stock of KEPCO to our capital. On December 29, 2001, the Government contributed W50 billion in cash to our capital. On August 13, 2003, the Government contributed W80 billion in cash to our capital to support our existing fund for facilitating the Republic’s regional economies. On April 30, 2004, the Government contributed W1 trillion in the form of shares of common stock of KEPCO and Korea Water Resources Corporation to our capital to support our lending to small-and medium-sized companies and to compensate for our contribution to LG Card Ltd. in the form of loans, cash injections and debt-for-equity swaps. On December 19, 2008, the Government contributed W500 billion in the form of shares of common stock of Korea Expressway Corporation to our capital and, in January 2009, the Government contributed W900 billion in cash to our capital, in each case to bolster our capital base in order to stabilize the Korean financial market by supporting small and medium-sized enterprises and providing increased liquidity to corporations. In October 2009, our paid-in capital decreased by W400.0 billion in connection with the establishment by the Government of KDBFG and KoFC by spinning off a portion of our assets, liabilities and equity (including paid-in capital). In March 2010, the Government, through KDBFG, made a further capital contribution of W10 billion in cash to our capital. In December 2013, the Government contributed W10 billion in cash to our capital. In December 2014, our paid-in capital increased by W5,918.5 billion in connection with the merger of KDBFG and KoFC into us as described under the heading “Overview” and “Selected Financial Statement Data” in this prospectus. Taking into account these capital contributions, reduction and merger, as of December 31, 2014, our total paid-in capital was W15,180.4 billion. See “—Financial Statements and the Auditors—Notes to Separate Financial Statements of December 31, 2014 and 2013—Note 22.” In April 2015, the Government further contributed W2 trillion in the form of shares of common stock of Korea Land & Housing Corporation and KEPCO to our capital to support our fund for infrastructure projects, new growth engine, high-tech and new renewable energy industries and business enterprises in general and as of April 30, 2015, our total paid-in capital was W17,180.4 billion.

In addition to capital contributions, the Government directly supports our financing activities by:

• lending us funds to on-lend;

• allowing us to administer Government loans made from a range of special Government funds;

• allowing us to administer some of The Bank of Korea’s surplus foreign exchange holdings; and

• allowing us to receive credit from The Bank of Korea.

The Government also supports our operations pursuant to Articles 31 and 32 of the KDB Act. Article 31 provides that “40% or more of the annual net profit of the Korea Development Bank shall be transferred to

8

reserve, until the reserve amounts equal the total amount of authorized capital” and that accumulated amounts in reserve may be capitalized. Article 32 provides that “the net losses of the Korea Development Bank shall be offset each fiscal year by the reserve, and if the reserve be insufficient, the deficit shall be replenished by the Government.”

As a result of the KDB Act, the Government is generally responsible for our operations and is legally obligated to replenish any deficit that arises if our reserve, consisting of our surplus and capital surplus items, is insufficient to cover our annual net losses. In light of the above, if we had insufficient funds to make any payment under any of our obligations, including the debt securities and the guarantees covered by this prospectus, the Government would take appropriate steps, such as by making a capital contribution, by allocating funds or by taking other action, to enable us to make such payment when due. The provisions of Article 32 do not, however, constitute a direct guarantee by the Government of our obligations under the debt securities or the guarantees, and the provisions of the KDB Act, including Article 32, may be amended at any time by action of the National Assembly.

The Government closely supervises our operations in the following ways:

• the Government has the power to elect or dismiss our Chairman and Chief Executive Officer, members of our Board of Directors and Auditor;

• within three months after the end of each fiscal year, we must submit our financial statements for the fiscal year to the Financial Services Commission;

• the Financial Services Commission has broad authority to require reports from us on any matter and to examine our books, records and other documents. On the basis of the reports and examinations, the Financial Services Commission may issue any orders deemed necessary to enforce the KDB Act;

• the Financial Services Commission must approve our operating manual, which sets out the guidelines for all principal operating matters;

• the Financial Services Commission may supervise our operations to ensure managerial soundness based upon the KDB Decree and the Bank Supervisory Regulations of the Financial Services Commission and may issue orders deemed necessary for such supervision; and

• we may amend our Articles of Incorporation only with the approval of the Financial Services Commission.

In addition, the conditions of the IMF aid package stated that domestic banks in the Republic, including us, should undergo external audits from internationally recognized accounting firms. Accordingly, we have had our annual financial statements for years commencing 1998 audited by an external auditor. See “—Financial Statements and the Auditors” and “Experts.”

Pursuant to our most recently approved program of operations, we expect to support the reform and restructuring of the Republic’s economic and industrial structure, including financing of promising small and medium sized enterprises, providing export finance and encouraging investments in infrastructure necessary to promote consumer demand and industrial reorganization.

Selected Financial Statement Data

Unless specified otherwise, the information provided below is stated on a separate basis in accordance with Korean IFRS.

Merger of KDBFG and KoFC into KDB

In May 2014, the Government and the National Assembly amended the KDB Act, which came into effect on December 31, 2014, to streamline the financial policy roles among Government-owned banks and financial corporations in order to better respond systematically to rapidly changing domestic and international economic

9

conditions by merging KDBFG and KoFC into us (the “Merger”). The Merger was effective on December 31, 2014. After the Merger, our ownership and organizational structure returned to our original ownership and organizational structure that existed prior to the establishment of KDBFG and KoFC through spin off and transfer of a portion of our assets, liabilities and equity in October 2009.

Consolidated Statements of Financial Position Data

The following table presents selected statements of financial position data regarding our assets, liabilities and shareholders’ equity on a consolidated basis as of December 31, 2013 (before the Merger) and December 31, 2014 (after the Merger), as well as selected statements of financial position data of KoFC, which was our ultimate parent company before the Merger, on a consolidated basis as of December 31, 2013 (before the Merger), and has been derived from our audited consolidated financial statements as of and for the years ended December 31, 2013 and 2014 and KoFC’s audited consolidated financial statements as of and for the year ended December 31, 2013.

	KDB Before Merger		KoFC Before Merger			KDB After Merger
	As of December 31, 2013		As of December 31, 2013			As of December 31, 2014
			(consolidated) (billions of Won)
Statements of Financial Position Data
Assets
Cash and due from banks		7,436.4		12,621.0			10,895.3
Financial assets held for trading		1,857.1		13,605.3			13,580.9
Financial assets designated at fair value through profit or loss		240.8		2,959.1			3,761.0
Available-for-sale financial assets		34,254.9		50,155.8			55,446.5
Loans (net of provision for possible loan losses and present value discounts)		98,059.2		133,300.6			143,484.4
Derivative financial assets		4,364.1		4,695.9			5,370.1
Investments in associates		3,073.2		20,726.3			22,013.9
Property and equipment		1,181.6		1,538.2			1,655.4
Other assets		17,257.4		19,200.3			21,070.5
Total assets		167,724.7		258,802.5			277,278.0
Liabilities and Shareholders’ Equity
Deposits		39,335.8		40,581.4			41,665.8
Financial liabilities designated at fair value through profit or loss		677.9		8,547.1			11,545.8
Borrowings		25,910.9		37,133.1			37,814.4
Bonds		57,221.3		111,837.2			120,731.3
Other liabilities		25,824.0		31,890.9			35,316.3
Total liabilities		148,969.9		229,989.7			247,073.6
Paid-in capital		9,261.9		15,000.0			15,180.4
Capital surplus		60.0		84.9			1,621.6
Capital adjustments		1.8		(165.7	)		223.7
Accumulated other comprehensive income (loss)		416.5		213.8			687.1
Retained Earnings		7,032.9		7,592.1			8,080.7
Non-controlling interests		1,981.7		6,087.7			4,410.9
Total shareholders’ equity		18,754.8		28,812.8			30,204.4
Total liabilities and shareholders’ equity		167,724.7		258,802.5			277,278.0

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Consolidated Income Statement Data

The following income statement data show our selected income statement items on a consolidated basis for the years ended December 31, 2013 (before the Merger) and December 31, 2014 (after the Merger), as well as selected income statement items of KoFC, which was our ultimate parent company before the Merger, on a consolidated basis for the year ended December 31, 2013 (before the Merger), and has been derived from our consolidated financial statements as of and for the years ended December 31, 2013 and 2014 and KoFC’s audited consolidated financial statements as of and for the year ended December 31, 2013.

	KDB Before Merger			KoFC Before Merger			KDB After Merger
	Year Ended December 31,
	2013			2013			2014
				(consolidated) (billions of Won)
Income Statement Data
Interest income		5,188.4			7,353.8			7,565.2
Interest expense		(3,099.7	)		(5,375.2	)		(5,186.0	)
Net interest income		2,088.7			1,978.6			2,379.2
Non-interest income (loss), net		(974.8	)		(209.6	)		1,600.0
Provision for loan losses		1,618.0			1,888.4			1,996.8
Operating income (loss)		(1,897.6	)		(2,179.7	)		150.2
Non-operating income (expense)		(358.8	)		(262.0	)		772.7
Profit (loss) before income taxes		(2,256.4	)		(2,441.8	)		922.9
Income tax benefit (expense)		605.4			905.5			203.6
Net income		(1,651.0	)		(1,536.2	)		1,126.5

Separate Financial Statement Data

The following tables present selected separate financial information as of and for the years ended December 31, 2013 and 2014, which has been derived from our audited separate K-IFRS financial statements as of and for the years ended December 31, 2013 and 2014 included in this prospectus. You should read the following financial statement data together with the financial statements and notes included in this prospectus.

Our statements of financial position data included in the following table have been derived from our audited separate financial statements as of and for the years ended December 31, 2013 and 2014 included in this prospectus. Note 47 of the notes to our separate financial statements as of and for the years December 31, 2013 and 2014 included in this prospectus provides information regarding the Merger and the amounts of assets and liabilities acquired by us in connection with the Merger.

	As of December 31,
	2013		2014
	(billions of won)
Statements of Financial Position Data
Total Loans(1)		98,119.8		136,760.1
Total Borrowings(2)		117,550.8		178,851.7
Total Assets		143,607.5		217,833.2
Total Liabilities		127,261.4		192,420.6
Equity(3)		16,346.1		25,412.6

(1) Gross amount, which includes loans for facility development, loans for working capital, inter-bank loans, private loans, off-shore loan receivables, loans borrowed from overseas financial institutions, bills bought in foreign currencies, advance payments on acceptances and guarantees and other loans without adjusting for allowance for loan losses, present value discounts and deferred loan fees.

(2) Total Borrowings include deposits, financial liabilities designated at fair value through profit or loss, borrowings and debt issued.

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As of December 31, 2014, our total assets increased by 51.7% to W217,833.2 billion from W143,607.5 billion as of December 31, 2013, primarily due to an increase in investments in subsidiaries and associates to W26,858.7 billion from W4,971.7 billion, an increase in available-for-sale financial assets to W38,160.0 billion from W25,534.2 billion and an increase in loans to W134,314.5 billion from W96,308.4 billion, which were attributable principally to the acquisition of equity and debt securities and loans from KoFC and KDBFG in connection with the Merger.

As of December 31, 2014, our total liabilities increased by 51.2% to W192,420.6 billion from W127,261.4 billion as of December 31, 2013, primarily due to an increase in bonds to W116,569.8 billion from W55,924.9 billion and an increase in deferred tax liabilities to W1,998.5 billion from W0 billion, which were attributable principally to the acquisition of borrowings and deferred tax liabilities from KoFC and KDBFG in connection with the Merger.

As of December 31, 2014, our total shareholders’ equity increased by 55.5% to W25,412.6 billion from W16,346.1 billion as of December 31, 2013, primarily due to an increase in paid-in capital to W15,180.4 billion from W9,261.9 billion as a result of the Merger.

Our income statement data included in the following table have been derived from our audited separate financial statements as of and for the years ended December 31, 2013 and 2014 included in this prospectus. As the Merger was effective on December 31,2014, our income statement data for the years ended December 31, 2013 and 2014 were not affected by the Merger.

	Year Ended December 31,
	2013			2014
	(billions of Won)
Income Statement Data
Total Interest Income		4,766.6			4,750.4
Total Interest Expense		3,036.1			2,761.9
Net Interest Income		1,730.5			1,988.5
Operating Income (Loss)		(858.1	)		424.7
Income before Income Tax		(1,963.3	)		216.8
Income Tax Benefit (expense)		515.9			(33.3	)
Net Income		(1,447.4	)		183.5

2014

We had net income of W183.5 billion in 2014 compared to net loss of W1,447.4 billion in 2013, on a separate K-IFRS basis.

Principal factors for the net income of W183.5 billion in 2014 compared to the net loss of W1,447.4 billion in 2013 included:

• a decrease in impairment losses on investments in subsidiaries and associates to W211.1 billion in 2014 from W1,095.4 billion in 2013; the W211.1 billion of impairment losses on investment in subsidiaries and associates in 2014 reflected principally the impairment loss on investments in Troica PE, primarily due to a decrease in oil price, and the W1,095.4 billion of impairment losses on investments in subsidiaries and associates in 2013 reflected principally the impairment loss on investments in Daewoo Engineering & Constructions Co., Ltd., which suffered losses in 2013 due in part to difficulties in the Korean construction industry;

• net gain on foreign currency transactions of W384.7 billion in 2014 compared to net loss of W252.9 billion in 2013, primarily due to the appreciation of the Won against foreign currencies in the first half of 2014;

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• a decrease in provision for other allowances to W45.3 billion in 2014 from W461.9 billion in 2013, primarily due to a decrease in provision for payment guarantees, which in turn was due to an improvement in our guarantee quality;

• an increase in reversals of provisions to W314.6 billion in 2014 from W11.2 billion in 2013, primarily due to an increase in reversals of provision for guarantee losses resulting from an improvement in our guarantee quality; and

• an increase in net interest income to W1,988.5 billion in 2014 from W1,730.5 billion in 2013, primarily due to an increase in loans.

The above factors were partially offset by net loss on derivatives of W319.6 billion in 2014 compared to net gain of W251.3 billion in 2013, primarily due to valuation loss on derivative financial instruments.

2013

We had net loss of W1,447.4 billion in 2013 compared to net income of W946.9 billion in 2012, on a separate K-IFRS basis.

Principal factors for the net loss of W1,447.4 billion in 2013 compared to the net income of W946.9 billion in 2012 included:

• an increase in provision for loan losses to W1,611.5 billion in 2013 from W455.4 billion in 2012, primarily due to an increase in non-performing loans;

• an increase in impairment losses on investments in subsidiaries and associates to W1,095.4 billion in 2013 from W135.3 billion in 2012; the W1,095.4 billion of impairment losses on investments in subsidiaries and associates in 2013 reflected principally the impairment loss on investments in Daewoo Engineering & Constructions Co., Ltd., which suffered losses in 2013 due in part to difficulties in the Korean construction industry, and the W135.3 billion of impairment losses on investments in subsidiaries and associates in 2012 reflected principally the impairment loss on investments in our subsidiaries providing banking and financial services;

• net loss on available-for-sale financial assets of W200.9 billion in 2013 compared to net gain of W130.8 billion in 2012, primarily due to impairment losses on investments in equity securities of companies under restructuring procedures (including STX Pan Ocean Co., Ltd.) in 2013 due in part to the prolonged slowdown in the global shipping and shipbuilding industries;

• a decrease in net gain on derivatives to W251.3 billion in 2013 from W385.4 billion in 2012, primarily due to a decrease in valuation gain on derivative financial instruments; and

• a decrease in net fees and commission income to W453.7 billion in 2013 from W573.7 billion in 2012, primarily due to a decrease in fees from financial advisory, syndication and underwriting.

The above factors were partially offset by net gain on financial instruments designated at fair value through profit or loss of W45.6 billion in 2013 compared to net loss of W64.1 billion in 2012, primarily due to an increase in valuation gains from financial liabilities designated at fair value through profit or loss.

Provisions for Possible Loan Losses and Loans in Arrears

We establish provisions for possible losses from problem loans, including guarantees and other extensions of credit, based on the length of the delinquent periods and the nature of the loans, including guarantees and other extensions of credit. As of December 31, 2014, we established provisions of W2,398.7 billion for possible loan losses, 35.3% higher than the provisions as of December 31, 2013 of W1,773.2 billion, primarily due to an increase in loans resulting from the Merger. The provisions for possible loan losses under Korean IFRS are recorded for those loans for which objective evidence of impairment exists as a result of one or more events that occurred after initial recognition and, if our provision for possible loan losses is deemed insufficient for

13

regulatory purposes, we compensate for the difference by recording a regulatory reserve for possible loan losses, which will be deducted from retained earnings. See Note 22(6) of the notes to our separate financial statements included in this prospectus.

Certain of our customers have restructured loans with their creditor banks. As of December 31, 2014, we have provided loans of W2,511.8 billion for companies under workout, court receivership, court mediation and other restructuring procedures. In addition, as of such date, we held equity securities of such companies in the amount of W1,425.1 billion following debt-equity swaps. As of December 31, 2014, we had established provisions of W821.3 billion for possible loan losses. We cannot assure you that actual results of the credit loss from the loans to these customers will not exceed the provisions reserved.

The following table provides information on our loan loss provisions.

		As of December 31, 2013(1)				As of December 31, 2014(1)
		Loan Amount		Loan Loss Provisions		Loan Amount		Loan Loss Provisions
		(billions of won)
Loan Classification	Normal(2)	W	91,696.7	W	208.0	W	128,501.3	W	292.0
	Precautionary		3,546.8		509.4		5,422.6		788.2
	Substandard		2,126.5		609.3		1,731.1		499.9
	Doubtful		305.1		205.9		369.5		304.0
	Expected Loss		444.7		240.7		735.6		514.6
	Total	W	98,119.8	W	1,773.2	W	136,760.1	W	2,398.7

(1) These figures include loans for facility development, loans for working capital, inter-bank loans, private loans, off-shore loan receivables, loans borrowed from overseas financial institutions, bills bought in foreign currencies, advance payments on acceptances and guarantees and other loans.

(2) Includes loans guaranteed by the Government. Under Korean IFRS, we establish loan loss provisions for all loans including loans guaranteed by the Government.

As of December 31, 2014, our non-performing loans totaled W2,836.2 billion, representing 2.1% of our outstanding loans as of such date. Non-performing loans are defined as loans that are classified as substandard or below. On December 31, 2014, our legal reserve was W5,400.5 billion, representing 3.9% of our outstanding loans as of such date.

Loans to Financially Troubled Companies

We have credit exposure (including loans, guarantees and equity investments) to a number of financially troubled Korean companies including STX Offshore & Shipbuilding, Dongbu Steel, Daehan Shipbuildng Co., Ltd., STX Heavy Industries and STX Engine. As of December 31, 2014, our credit extended to these companies totaled W7,063.6 billion, accounting for 3.2% of our total assets as of such date.

As of December 31, 2014, our exposure (including loans classified as substandard or below and equity investment classified as estimated loss or below) to STX Offshore & Shipbuilding increased to W3,898.8 billion from W2,554.5 billion as of December 31, 2013, primarily due to the Merger and extension of new loans. As of December 31, 2014, our exposure to Dongbu Steel was W1,551.9 billion, an increase from W922.5 billion as of December 31, 2013, primarily due to the extension of new loans. As of December 31, 2014, our exposure to Daehan Shipbuilding increased to W592.1 billion from W198.1 billion as of December 31, 2013, primarily due to an increase in revolving loans. As of December 31, 2014, our exposure to STX Heavy Industries increased to W550.1 billion from W445.9 billion as of December 31, 2013, primarily due to the Merger. As of December 31, 2014, our exposure to STX Engine increased to W470.7 billion from W293.7 billion as of December 31, 2013, primarily due to the Merger.

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As of December 31, 2014, we established provisions of W389.9 billion for our exposure to STX Offshore & Shipdbuiling, W305.1 billion for Dongbu Steel, W29.3 billion for Daehan Shipbuidling, W33.1 billion for STX Heavy Industries and W57.6 billion for STX Engine.

Companies in the STX Group, a large Korean conglomerate primarily engaged in shipbuilding and trading, have faced financial difficulties for the past several years due to prolonged slowdowns in the Korean construction and shipbuilding industries. STX Construction and STX Pan Ocean have been in court receivership since April and June 2013, respectively, and the remaining troubled companies (including STX Corporation, STX Engine and STX Heavy Industries) are in voluntary out-of-court debt restructuring programs with their creditors. Kang Duk-soo, former chairman of the STX Group, was indicted in May 2014 for accounting fraud, business malpractice and embezzlement. Companies in the Dongbu Group, a large Korean conglomerate providing industrial, chemical, shipping, insurance and financial products and services, have also been facing financial difficulties for the past several years due to the prolonged slowdown in the Korean construction industry and in the Korean economy in general. Certain troubled companies in the Dongbu Group are in voluntary out-of-court debt restructuring programs with their creditors, and recently, Dongbu Steel entered into a voluntary workout agreement with its creditors. We are the main creditor bank of STX Group and Dongbu Group.

In the event that the financial condition of these companies or other large corporations to which we extended credits deteriorate in the future, we may be required to record additional provisions for credit losses, as well as charge-offs and valuation or impairment losses or losses on disposal, which may have a material adverse effect on our financial condition and results of operations.

On July 14, 2014, according to press reports, the Financial Supervisory Service had decided to launch a special audit into KDB, as the lead creditor bank of the troubled STX Group and Dongbu Group, for alleged mismanagement and loose oversight of the two conglomerates, which allegedly contributed to further losses. Although we believe we have extended loans to both Groups in compliance with relevant guidelines and procedures, we cannot predict the outcome of such special audit. In addition, further investigations may be launched by governmental authorities with respect to the alleged legal violations by us and our employees and any adverse determination, decision or resolution in such matter could encourage other parties to bring related claims and actions against us. While our management is not able to estimate the possible penalties and losses that may result from this special audit at this time, an adverse determination by the Financial Supervisory Service or other governmental authorities in this special audit may result in regulatory sanctions and significant financial liability as well as reputational harm to us.

In 2014, we did not sell any non-performing loans to the Korea Asset Management Corporation, or KAMCO.

Operations

Loan Operations

We mainly provide equipment capital loans, project loans and working capital loans to private Korean enterprises that undertake major industrial projects either directly or indirectly through on-lending. The loans generally cover over 50%, and in some cases as much as 100%, of the total project cost. Equipment capital loans include loans to major industries for development of high technology and for acquisition, improvement or repair of machinery and equipment. We disburse loan proceeds in installments to ensure that the borrower uses the loan for its intended purpose.

Before approving a loan, we consider:

• the economic benefits of the project to the Republic;

• the extent to which the project serves priorities established by the Government’s industrial policy;

15

• the project’s operational feasibility;

• the loan’s and the project’s profitability; and

• the quality of the borrower’s management.

We charge, on average, interest of 1.8% over our prime rate, although we provide a discount between 0.2% and 0.7% to small- and medium-sized companies. We adjust the prime rate monthly. The spread depends on the purpose of the loan, maturity date and the borrower’s credit ratings. Certain loans bear interest at below market rates. Equipment capital loans generally have original maturities of three to five years, although we occasionally make equipment capital loans with longer maturities. Working capital loans usually mature within two years.

The Business Planning Department functions as our centralized policy-making and planning division with respect to our lending activities. The Business Planning Department formulates and revises our internal regulations on loan programs as well as setting basic lending guidelines.

We have multiple levels of loan approval authority, depending on the loan amount and other factors such as the availability of collateral or guarantee, debt repayment ability and business prospects. The Credit Review Committee, Division Credit Review Committee, Division Credit Review Sub-Committee, General Manager each has authority to approve loans up to a specified amount. The amount differs depending on the type of loan and certain other factors, for example, whether a loan is collateralized or guaranteed.

Our overall risk management policy is set by the Risk Management Committee. For detailed information regarding our risk management policy and procedures, see “—Financial Statements and Auditors—Notes to Separate Financial Statements of December 31, 2014 and 2013—Note 48.”

The following table sets out, by currency and category of loan, our total outstanding loans:

Loans⁽¹⁾

	December 31,
	2013		2014
	(billions of won)
Equipment Capital Loans:
Domestic Currency	W	33,839.6	W	51,574.4
Foreign Currency(2)		6,467.8		9,134.4
		40,307.4		60,708.8
Working Capital Loans:
Domestic Currency(3)		29,761.2		45,268.0
Foreign Currency(2)		5,425.0		6,184.7
		35,186.2		51,452.7
Other Loans(4)		22,626.2		24,598.6
Total Loans	W	98,119.8	W	136,760.1

(1) Includes loans extended to affiliates.

(2) Includes loans disbursed and repayable in Won, the amounts of which are based upon an equivalent amount of foreign currency. This type of loan totaled W6,751.2 billion as of December 31, 2013 and W10,323.1 billion as of December 31, 2014. See “—Operations—Loan Operations—Loans by Categories—Local Currency Loans Denominated in Foreign Currencies.”

(3) Includes loans on households.

(4) Includes inter-bank loans, private loans, off-shore loan receivables, loans borrowed from overseas financial institutions, bills bought in foreign currencies, advance payments on acceptances and guarantees and other loans.

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As of December 31, 2014, we had W136,760.1 billion in outstanding loans, which represents a 39.4% increase from W98,119.8 billion of outstanding loans as of December 31, 2013 principally as a result of the Merger.

Maturities of Outstanding Loans

The following table categorizes our outstanding equipment capital and working capital loans by their remaining maturities:

Outstanding Equipment Capital and Working Capital Loans by Remaining Maturities⁽¹⁾

	December 31,				As % of December 31, 2014 Total
	2013		2014
	(billions of won, except percentages)
Loans with Remaining Maturities of One Year or Less	W	34,820.8	W	39,925.4		35.6	%
Loans with Remaining Maturities of More Than One Year		40,672.8		72,236.1		64.4	%
Total	W	75,493.6	W	112,161.5		100.0	%

(1) Includes loans extended to affiliates.

Loans by Industrial Sector

The following table sets out the total amount of our outstanding equipment capital and working capital loans, categorized by industry sector:

Outstanding Equipment Capital and Working Capital Loans by Industry Sector⁽¹⁾

	December 31,						As % of December 31, 2014 Total
	2013			2014
	(billions of won, except percentages)
Manufacturing	W	42,969.6		W	53,630.1			47.8	%
Banking and Insurance		7,253.6			24,307.6			21.7
Transportation and Communication		5,768.5			7,266.4			6.5
Public Administration		30.6			730.2			0.7
Electric, Gas and Water Supply Industry		2,293.0			3,052.2			2.7
Others(2)		17,178.3			23,175.0			20.6
Total	W	75,493.6		W	112,161.5			100.0	%
Percentage increase from previous period		9.7	%		48.6	%

(1) Includes loans extended to affiliates.

(2) Includes wholesale and retail trade, real estate and leasing, and construction.

The manufacturing sector accounted for 47.8% of our outstanding equipment capital and working capital loans as of December 31, 2014. As of December 31, 2014, loans to the transportation equipment manufacturing businesses and chemical product manufacturing businesses accounted for 15.8% and 15.1%, respectively, of our outstanding equipment capital and working capital loans to the manufacturing sector.

Industrial Bank of Korea was our single largest borrower as of December 31, 2014, accounting for 4.0% of our outstanding equipment capital and working capital loans. As of December 31, 2014, our five largest borrowers and 20 largest borrowers accounted for 10.9% and 24.1%, respectively, of our outstanding equipment capital and working capital loans.

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The following table breaks down the equipment capital and working capital loans to our 20 largest borrowers outstanding as of December 31, 2014 by industry sector:

20 Largest Borrowers by Industry Sector

	As % of December 31, 2014 Total Outstanding Equipment Capital and Working Capital Loans
Manufacturing		51.6	%
Banking and Insurance		18.4
Transportation and Communication		12.4
Public Administration		3.0
Others(1)		14.6
Total		100.0	%

(1) Includes wholesale and retail trade, real estate and leasing, and construction.

The following table categorizes the new loans made by us by industry sector:

New Loans by Industry Sector

	Year Ended December 31,						As % of Year Ended December 31, 2014 Total
	2013			2014
	(billions of won, except percentages)
Manufacturing	W	22,082.3		W	27,464.7			61.0	%
Banking and Insurance		2,594.2			3,283.3			7.3
Transportation and Communication		2,386.7			2,586.7			5.8
Electric, Gas and Water Supply Industry		524.4			776.9			1.7
Others(1)		9,488.7			10,926.0			24.2
Total	W	37,076.3		W	45,037.6			100.0	%
Percentage increase (decrease) from previous period		12.2	%		21.5	%

(1) Includes wholesale and retail trade, real estate and leasing, and construction.

Loans by Categories

In addition to dividing our loans into equipment capital and working capital loans, we classify loans into several groupings, the most important being:

• industrial fund loans;

• foreign currency loans;

• local currency loans denominated in foreign currencies;

• offshore loans in foreign countries; and

• government fund loans.

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The following table sets out equipment capital and working capital loans by categories as of December 31, 2014:

	Equipment Capital Loans(1)					Working Capital Loans(1)
	December 31, 2014		%			December 31, 2014		%
	(billions of won, except percentages)
Industrial fund loans	W	42,186.2		69.5	%	W	33,298.1		64.7	%
Foreign currency loans		6,692.0		11.0			1,225.5		2.4
Local currency loans denominated in foreign currencies		340.5		0.6			1,440.7		2.8
Offshore loans in foreign currencies		1,055.9		1.7			1,225.5		2.4
Government fund loans		493.7		0.8			—		—
Overdraft		—		—			509.3		1.0
Others(1)		9,940.5		16.4			13,753.6		26.7
Total	W	60,708.8		100.0	%	W	51,452.7		100.0	%

(1) Includes loans on households and loans extended to affiliates.

Industrial Fund Loans. Industrial fund loans are equipment capital and working capital loans denominated in Won to borrowers in major industries to finance equipment and facilities.

We currently make equipment capital industrial fund loans at floating or fixed rates for terms of up to 10 years and for up to 100% of the equipment cost being financed. We make working capital industrial fund loans at floating or fixed rates and in amounts constituting up to 40% of the borrower’s estimated annual sales.

Foreign Currency Loans. We extend loans denominated in U.S. dollars, Japanese yen or other foreign currencies principally to finance the purchase of industrial equipment from abroad or the implementation of overseas industrial development projects by Korean companies. We make these loans at floating interest rates with original maturities, in the case of equipment capital foreign currency loans, of up to 10 years and, in the case of working capital foreign currency loans, of up to three years.

Local Currency Loans Denominated in Foreign Currencies. We make local currency loans denominated in foreign currencies for the same purposes, and to the same borrowers, as foreign currency loans. Although we denominate the loans in foreign currency, the borrower receives and repays the loans in Won based on foreign exchange rates at the time of receipt and repayment. We currently make loans of this type at floating interest rates, with original maturities, in the case of equipment capital loans, of up to 10 years and, in the case of working capital loans, of up to three years.

Offshore Loans in Foreign Currencies. We extend offshore loans in foreign currencies to finance:

• the purchase of industrial equipment and the implementation of overseas industrial projects by overseas subsidiaries and branches of Korean companies; and

• the overseas industrial development projects of foreign government entities, international organizations and foreign companies.

We make these loans at floating interest rates with original maturities, in the form of equipment capital foreign currency loans, of up to 10 years and, working capital foreign currency loans, of up to three years.

Government Fund Loans. We make government fund loans primarily to finance:

• water supply and drainage facilities;

• the Seoul subway system;

• freight terminal facilities;

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• hospitals; and

• other facilities.

Government fund loans that are equipment capital loans require approval by the appropriate Government ministry. We currently make government fund loans in Won at floating interest rates with original maturities of 10 to 20 years.

Other Loans. We also make special purpose fund loans for particular industries or projects using funds lent to us by the Government and foreign financial institutions. The Government funds that finance these loans include, among others:

• the Tourism Promotion Fund (hotel and resort projects);

• the Rational Use of Energy Fund (energy conservation projects and collective energy supply projects); and

• the Small- and Medium-sized Enterprises Promotion Fund (small- and medium-sized enterprises).

For further information relating to such loans, see “—Sources of Funds.”

Guarantee Operations

We extend guarantees to our clients to facilitate their other borrowings and to finance major industrial projects. We guarantee Won-denominated corporate debentures, local currency loans, and other Won liabilities and foreign currency loans from domestic and overseas Korean financial institutions and from foreign institutions. The KDB Act and our Articles of Incorporation limit the aggregate amount of our industrial finance bond obligations and guarantee obligations. See “—Sources of Funds.”

We generally obtain collateral valued in excess of the original guarantee. We appraise the value of our collateral at least once a year. Depending on the borrower, the collateral may be industrial plants, real estate and/or marketable securities.

The following table shows our outstanding guarantees:

Guarantees Outstanding

	As of December 31,
	2013		2014
	(billions of won)
Acceptances	W	766.1	W	761.6
Guarantees on local borrowing		821.3		1,573.9
Guarantees on foreign borrowing		5,949.6		5,902.9
Letter of guarantee for importers		42.4		48.3
Total	W	7,579.4	W	8,286.7

On November 13, 2002, we entered into a guarantee agreement with KEPCO with respect to certain of KEPCO’s debt securities in connection with KEPCO’s restructuring and privatization. Pursuant to the guarantee agreement, we issued in February 2003 our guarantee to holders of KEPCO’s Yankee and Global debt securities with final maturities ranging from 2003 to 2096 (although our guarantee obligations only run through 2016) in an aggregate principal amount of approximately W3.3 trillion, based on exchange rates prevailing on the guarantee issuance date, February 25, 2003. As of December 31, 2014, the aggregate outstanding principal amount of KEPCO’s debt securities that are covered by our guarantees was W198.7 billion. The guarantees described above

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constitute full, irrevocable and unconditional guarantees, on an unsecured and unsubordinated basis, in respect of the principal, interest and other payments due with respect to those debt obligations. KEPCO paid and will continue to pay us an annual guarantee fee of 0.05% of (i) the aggregate outstanding principal amount of all issues of debt securities that will be covered by the benefit of our guarantee and (ii) the sum of all interest payments due on such debt securities from the date of calculation until the earlier of their maturity or their stated redemption date.

We currently own approximately 32.9% of the outstanding shares of common stock of KEPCO, and the Government, which directly owns all of our paid-in capital, owns an additional 18.2% of such shares of KEPCO.

Investments

We invest in a range of Korean private and Government-owned enterprises but we will not take a controlling interest in a company unless the acquisition is necessary for the corporate restructuring of the company. Although generally a long-term investor, we sell investments from time to time. In recent years, sales resulted principally from the Government’s privatization program, and we expect to continue such sales in the future. The Government plans to sell its direct or indirect interest in certain private sector companies acquired during previous restructuring programs, including Daewoo Shipbuilding & Marine Engineering Co. Ltd., depending on market conditions. In accordance with such plan, we expect to sell our equity holdings in certain private sector companies if favorable opportunities for sale arise. Our equity investments increased to W32,737.2 billion as of December 31, 2014 from W7,241.2 billion as of December 31, 2013, principally due to the Merger.

The KDB Act and our Articles of Incorporation provide that the cost basis of our total equity investments may not exceed twice the sum of our paid-in capital and our reserve from profit. In addition, pursuant to the KDB Decree, we may not acquire equity securities of a single company in excess of 15% of its entire voting shares. The 15% limit, however, does not apply to certain investments, including those in Government-controlled companies financed by capital contributions from the Government. As of December 31, 2014, the cost basis of our equity investments subject to restriction under the KDB Act and our Articles of Incorporation totaled W32,737.2 billion, equal to 79.5% of our equity investment ceiling. For a discussion of Korean accounting principles relating to our equity investments, see “—Financial Statements and the Auditors.”

The following table sets out our equity investments by industry sector on a book value basis as of December 31, 2014:

Equity Investments

	Book Value as of December 31, 2014
	(billions of won)
Electric, Gas and Water Supply Industry	W	13,390.7
Construction		1,117.0
Banking and Insurance		8,484.1
Real Estate Business		2,605.2
Manufacturing		1,373.4
Transportation and Communication		1,772.2
Others		3,994.6
Total	W	32,737.2

As of December 31, 2014, we held total equity investments, on a book value basis, of W743.3 billion in one of our five largest borrowers and W1,797.3 billion in five of our 20 largest borrowers. We have not established a policy addressing loans to enterprises in which we hold equity interests or equity interests in enterprises to which we have extended loans.

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When possible, we use the prevailing market price of a security to determine the value of our interest. However, if no readily ascertainable market value exists for our holdings, we record these investments at the cost of acquisition. With respect to our equity interests in enterprises in which we hold more than 15% of interest, we value these investments annually, with certain exceptions, on a net asset value basis when the investee company releases its financial statements. As of December 31, 2014, the aggregate value of our equity investments accounted for approximately 105% of their aggregate cost basis.

As part of our investment activities, we underwrite straight and convertible bond issuances in Won for domestic corporations. We also invest in municipal bonds, extending funds to municipalities at subsidized interest rates, mostly to finance water supply and drainage infrastructure projects.

Other Activities

We engage in a range of industrial development activities in addition to providing loans and guarantees, including:

• conducting economic and industrial research;

• performing engineering surveys;

• providing business analyses and managerial assistance; and

• offering trust services.

As of December 31, 2014, we held in trust cash and other assets totaling W30,827.3 billion, and we generated in 2014 trust fee income equaling W175.8 billion. As of December 31, 2013, we held in trust cash and other assets totaling W30,723.9 billion, and we generated in 2013 trust fee income equaling W249.4 billion. Pursuant to Korean law, we segregate trust assets from our other assets; trust assets are not available to satisfy claims of our depositors or other creditors. Accordingly, we account for our trust accounts separately from our banking accounts. However, if our trust operations fail to preserve the principal of our clients’ trust assets, we are responsible for covering the deficit either from previously established provisions in our trust accounts or by a transfer from our banking accounts. In 2013 and 2014, we did not transfer any funds from our banking accounts to cover deficits in our trust accounts. Surplus funds generated by the trust assets may be deposited into the clients’ accounts and earn interest. We reflect trust fees earned by us on our trust account management services as other operating revenues in the income statement of the banking accounts.

Sources of Funds

In addition to our capital and reserves, we obtain funds primarily from:

• borrowings from the Government;

• issuances of bonds in the domestic and international capital markets;

• borrowings from international financial institutions or foreign banks; and

• deposits.

All of our borrowings are unsecured.

Borrowings from the Government

We borrow from the Government’s general purpose funds and its special purpose funds. General purpose loans generally are in Won and have fixed interest rates and maturities ranging from five to 20 years. We incur special purpose loans, principally from the Tourism Promotion Fund, the Rational Use of Energy Fund and the

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Small- and Medium-sized Enterprises Promotion Fund, in connection with specific projects we finance. The Government links the interest rate and maturity of each special purpose borrowing to the terms of the financing we provide for the specific project.

The following table sets out our Government borrowings as of December 31, 2014:

Type of Funds Borrowed	As of December 31, 2014
	(billions of won)
General Purpose	W	495.6
Special Purpose		6,959.2
Total	W	7,454.8

Domestic and International Capital Markets

We issue industrial finance bonds both in Korea and abroad, some of which the Government directly guarantees. We generally issue domestic bonds at fixed interest rates with original maturities of one to ten years.

The following table sets out the outstanding balance of our industrial finance bonds as of December 31, 2014:

Outstanding Balance	As of December 31, 2014
	(billions of won)
Denominated in Won	W	92,616.9
Denominated in Other Currencies		26,086.4
Total	W	118,703.3

The KDB Act provides that the aggregate outstanding principal amount of our industrial finance bonds, other than those directly guaranteed or purchased by the Government, plus the aggregate outstanding amount of our on-balance sheet and off-balance sheet guarantee obligations, other than those excepted by statute, may not exceed 30 times the sum of our paid-in capital and our reserve from profit. As of December 31, 2014, the aggregate amount of our industrial finance bonds and guarantee obligations (including guarantee obligations relating to loans that had not been borrowed as of December 31, 2014) was W129,955.2 billion, equal to 21.0% of our authorized amount under the KDB Act, which was W617,427.5 billion.

In 2014, we have issued W40.7 trillion in Won denominated industrial finance bonds and W6.7 trillion in industrial finance bonds denominated in other currencies. In 2015, we are targeting to issue approximately W39.8 trillion in Won denominated industrial finance bonds and approximately W6.6 trillion in industrial finance bonds denominated in other currencies, subject to change depending on our funding needs and market conditions.

Foreign Currency Borrowings

We borrow money from institutions, principally syndicates of commercial banks, outside the Republic in foreign currencies. We frequently enter into related interest rate and currency swap transactions. The loans generally have original maturities of one to five years. As of December 31, 2014, the outstanding amount of our foreign currency borrowings was US$11.0 billion.

Our long term and short term foreign currency borrowings decreased to W12,139.6 billion as of December 31, 2014 from W12,938.4 billion as of December 31, 2013.

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Deposits

We take demand deposits and time and savings deposits from the general public. Time and savings deposits generally have maturities shorter than three years and bear interest at fixed rates. As of December 31, 2014, demand deposits held by us totaled W1,041.9 billion and time and savings deposits held by us totaled W33,477.0 billion.

Debt

Debt Repayment Schedule

The following table sets out our principal repayment schedule as of December 31, 2014:

Debt Principal Repayment Schedule⁽¹⁾

	Maturing on or before December 31,
Currency(2)(3)	2015		2016		2017		2018		Thereafter
	(billions of won)
Won	W	31,418.2	W	19,487.3	W	18,111.0	W	4,762.8	W	25,398.8
Foreign		15,938.3		6,354.7		5,680.8		3,820.2		6,720.4
Total Won Equivalent	W	47,356.5	W	25,842.0	W	23,791.8	W	8,583.0	W	32,119.2

(1) Excludes bonds sold under repurchase agreements and call money.

(2) Borrowings in foreign currencies have been translated into Won at the market average exchange rates on December 31, 2014, as announced by the Seoul Money Brokerage Services Ltd.

(3) We categorize debt with respect to which we have entered into currency swap agreements by our repayment currency under such agreements.

The following table summarizes, as of December 31 of the years indicated, our outstanding direct internal debt:

Direct Internal Debt

	(billions of Won)
2010	W	36,802.2
2011		39,185.4
2012		37,515.4
2013		46,237.4
2014		99,441.9

The following table summarizes, as of December 31 of the years indicated, our outstanding direct external debt:

Direct External Debt

	(billions of Won)
2010	W	26,476.2
2011		31,107.9
2012		29,780.4
2013		31,080.3
2014		37,260.0

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The following table sets out, by currency and the equivalent amount in U.S. Dollars, our outstanding external bonds as of December 31, 2014:

External Bonds

	Amount in Original Currency		Equivalent Amount in U.S. Dollars(1)
	(millions)
US$	US$	15,144.0	US$	15,144.0
Japanese yen (¥)	¥	189,600.0		1,778.6
Euro (EUR)	EUR	1,298.0		1,697.5
Singapore dollar (SGD)	SGD	66.0		52.5
Hong Kong dollar (HKD)	HKD	4,703.0		605.2
Chinese offshore renminbi (CNH)	CNH	1,960.0		310.7
Swiss franc (CHF)	CHF	1,100.0		1,202.9
Brazilian real (BRL)	BRL	598.5		305.8
Australian dollar (AUD)	AUD	1,572.5		1,545.6
Great Britain Sterling (GBP)	GBP	250.0		393.4
Malaysian Ringgit (MYR)	MYR	500.0		163.5
Turkish Lira (TRY)	TRY	323.9		175.7
New Zealand dollar (NZD)	NZD	200.0		162.4
Mexican Peso (MXN)	MXN	144.0		10.8
Norwegian Krone (NOK)	NOK	300.0		50.0
South African Rand (ZAR)	ZAR	822.0		80.1
Total			US$	23,678.7

(1) Amounts expressed in currencies other than US$ are converted to US$ at the exchange rate announced by the Seoul Money Brokerage Services, Ltd. in effect on December 31, 2014.

For further information on our outstanding indebtedness, see “—Tables and Supplementary Information.”

Debt Record

We have never defaulted in the payment of principal or interest on any of our obligations.

Overseas Operations

We operate overseas subsidiaries in Hong Kong, Dublin, Budapest, Sao Paulo and Tashkent. The subsidiaries engage in a variety of banking and merchant banking services, including:

• managing and underwriting new securities issues;

• syndicating medium and long-term loans;

• trading securities;

• trading in the money market; and

• providing investment management and advisory services.

We currently maintain eight branches in Tokyo, Shanghai, Singapore, New York, London, Beijing, Guangzhou and Shenyang and seven overseas representative offices in Frankfurt, Ho Chi Minh City, Abu Dhabi, Yangon, Moscow, Manila and Bangkok.

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Property

Our head office is located at 14 Eunhaeng-ro Yeongdeungpo-gu, Seoul, Korea, a 35,996 square meter building completed in July 2001 and owned by us. In addition to the head office, we maintain 82 branches in major cities throughout the Republic, including 29 in Seoul. We generally lease our domestic and overseas offices under long-term leases.

Directors and Management; Employees

Our Board of Directors has ultimate responsibility for management of our affairs. Under the KDB Act and our Articles of Incorporation, our Board of Directors is to consist of not more than eight directors, including our Chief Executive Officer and Chairman of the Board of Directors. Under the KDB Act, the President of the Republic appoints our Chief Executive Officer and Chairman of the Board of Directors upon the recommendation of the Chairman of the Financial Services Commission. The Financial Services Commission appoints all of our Directors upon the recommendation of our Chief Executive Officer. Under our Articles of Incorporation, our executive directors serve for three-year terms and they may be re-appointed, and our independent non-executive directors serve for two-year terms and they may be re-appointed; provided, however, that our independent non-executive directors shall not serve more than one year for each reappointment and shall not serve more than five years consecutively. Currently, the members of our Board of Directors are:

Position	Name	Expiration of Term
Chief Executive Officer and Chairman of the Board of Directors:	Kyttack Hong	April 8, 2016
Chief Operating Officer and Vice Chairman of the Board of Directors	Heui Kyoung Ryu	February 2, 2017
Executive Directors	Hyung Chul Shin	April 10, 2017
	Dai Hyun Lee	December 30, 2017
Independent Non-executive Directors	Sang Heon Kim	April 26, 2016
	Cheol-Joon Kang	April 26, 2016
	Hi-Taek Shin	August 1, 2015
	Hay-Young Chung	February 12, 2016
	Jae Woon Koo	October 30, 2015

As of December 31, 2014, we employed 3,302 persons with 1,900 located in our Seoul head office.

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Tables and Supplementary Information

A. External Debt of KDB

(1) External Bonds of KDB

Currency	Original Principal Amount		Interest Rate (%)		Issue Date	Maturity Date	Principal Amount Outstanding as of December 31, 2014
USD		50,000,000		3M USD Libor + 4.3	May 13, 2009	May 13, 2016		50,000,000
USD		550,000,000		4.375	February 10, 2010	August 10, 2015		550,000,000
USD		200,000,000		4.375	February 10, 2010	August 10, 2015		200,000,000
USD		450,000,000		3.250	September 9, 2010	March 9, 2016		450,000,000
USD		250,000,000		3.250	September 9, 2010	March 9, 2016		250,000,000
USD		200,000,000		3.250	September 9, 2010	March 9, 2016		200,000,000
USD		750,000,000		4.000	March 9, 2011	September 9, 2016		750,000,000
USD		700,000,000		3.875	November 4, 2011	May 4, 2017		700,000,000
USD		300,000,000		3.875	November 4, 2011	May 4, 2017		300,000,000
USD		150,000,000		3.50	February 22, 2012	August 22, 2017		150,000,000
USD		100,000,000		3.50	February 22, 2012	August 22, 2017		100,000,000
USD		500,000,000		3.50	February 22, 2012	August 22, 2017		500,000,000
USD		15,000,000		3M USD Libor + 1.45	June 15, 2012	June 15, 2015		15,000,000
USD		500,000,000		3.50	July 5, 2012	August 22, 2017		500,000,000
USD		300,000,000		3.00	September 14, 2012	September 14, 2022		300,000,000
USD		350,000,000		3.00	September 14, 2012	September 14, 2022		350,000,000
USD		100,000,000		3.00	September 14, 2012	September 14, 2022		100,000,000
USD		20,000,000		3M USD Libor + 0.95	September 27, 2012	September 29, 2015		20,000,000
USD		30,000,000		3M USD Libor + 0.87	October 19, 2012	October 19, 2015		30,000,000
USD		200,000,000		1.00	January 22, 2013	January 22, 2016		200,000,000
USD		300,000,000		1.00	January 22, 2013	January 22, 2016		300,000,000
USD		500,000,000		1.50	January 22, 2013	January 22, 2018		500,000,000
USD		30,000,000		3M USD Libor + 0.60	March 21, 2013	March 21, 2016		30,000,000
USD		30,000,000		3M USD Libor + 1.00	June 10, 2013	June 10, 2018		30,000,000
USD		150,000,000		0.90	August 20, 2013	February 20, 2015		150,000,000
USD		23,500,000		1.17	August 20, 2013	August 20, 2015		23,500,000
USD		76,500,000		3M USD Libor + 0.70	August 20, 2013	August 20, 2015		76,500,000
USD		250,000,000		4.00	August 27, 2013	September 9, 2016		250,000,000
USD		300,000,000		3.00	September 17, 2013	March 17, 2019		300,000,000
USD		450,000,000		3.00	September 17, 2013	March 17, 2019		450,000,000
USD		35,000,000		1.24	October 2, 2013	October 2, 2015		35,000,000
USD		25,000,000		1.10	October 7, 2013	October 2, 2015		25,000,000
USD		40,000,000		3.81	October 30, 2013	October 30, 2023		40,000,000
USD		30,000,000		4.00	November 1, 2013	November 1, 2023		30,000,000
USD		50,000,000		3.74	November 5, 2013	November 5, 2023		50,000,000
USD		50,000,000		3.70	November 6, 2013	November 6, 2023		50,000,000
USD		100,000,000		3M USD Libor + 0.85	November 8, 2013	November 8, 2016		100,000,000
USD		30,000,000		3.79	November 13, 2013	November 13, 2023		30,000,000
USD		50,000,000		3.8	November 13, 2013	November 13, 2023		50,000,000
USD		50,000,000		3.75	November 15, 2013	November 15, 2023		50,000,000
USD		20,000,000		3.66	November 26, 2013	November 26, 2023		20,000,000
USD		60,000,000		3.68	November 26, 2013	November 26, 2023		60,000,000
USD		100,000,000		3M USD Libor + 0.45	December 11, 2013	June 11, 2015		100,000,000
USD		50,000,000		3.8	December 12, 2013	December 12, 2023		50,000,000
USD		20,000,000		3.8	December 18, 2013	December 18, 2023		20,000,000
USD		20,000,000		3.81	December 18, 2013	December 18, 2023		20,000,000
USD		150,000,000		3M USD Libor + 0.625	January 22, 2014	January 22, 2017		150,000,000
USD		600,000,000		3M USD Libor + 0.625	January 22, 2014	January 22, 2017		600,000,000
USD		750,000,000		3.75	January 22, 2014	January 22, 2024		750,000,000
USD		20,000,000		0.545	January 17, 2014	January 20, 2015		20,000,000
USD		30,000,000		0.545	January 17, 2014	January 20, 2015		30,000,000
USD		50,000,000		0.545	January 17, 2014	January 20, 2015		50,000,000
USD		50,000,000		3M USD Libor + 0.25	March 14, 2014	March 15, 2015		50,000,000
USD		20,000,000		1.39	March 17, 2014	March 17, 2017		20,000,000
USD		50,000,000		3M USD Libor + 0.28	April 1, 2014	April 2, 2015		50,000,000
USD		100,000,000		0.55	April 1, 2014	April 2, 2015		100,000,000

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Currency	Original Principal Amount		Interest Rate (%)		Issue Date	Maturity Date	Principal Amount Outstanding as of December 31, 2014
USD		50,000,000		3M USD Libor + 0.28	April 25, 2014	April 27, 2015		50,000,000
USD		30,000,000		3.605	April 29, 2014	April 29, 2024		30,000,000
USD		50,000,000		3.62	April 29, 2014	April 29, 2024		50,000,000
USD		20,000,000		3.615	April 30, 2014	April 30, 2024		20,000,000
USD		15,000,000		1.22	May 9, 2014	November 9, 2016		15,000,000
USD		50,000,000		1.22	May 9, 2014	November 9, 2016		50,000,000
USD		200,000,000		0.5125	May 7, 2014	May 8, 2015		200,000,000
USD		350,000,000		2.5	September 11, 2014	March 11, 2020		350,000,000
USD		400,000,000		2.5	September 11, 2014	March 11, 2020		400,000,000
USD		80,000,000		3M USD Libor + 0.2	September 30, 2014	October 1, 2015		80,000,000
USD		50,000,000		3.25	November 14, 2014	November 14, 2024		50,000,000
USD		20,000,000		3M USD Libor + 0.25	December 15, 2014	December 16, 2015		20,000,000
USD		200,000,000		0.0325	September 20, 2010	September 20, 2016		200,000,000
USD		550,000,000		0.0325	September 20, 2010	September 20, 2016		550,000,000
USD		750,000,000		0.04625	November 16, 2011	November 16, 2021		750,000,000
USD		200,000,000		0.0225	August 7, 2012	August 7, 2017		200,000,000
USD		300,000,000		0.0225	August 7, 2012	August 7, 2017		300,000,000
USD		300,000,000		0.0225	September 24, 2012	August 7, 2017		300,000,000
USD		200,000,000		0.02875	August 22, 2013	August 22, 2018		200,000,000
USD		300,000,000		0.02875	August 22, 2013	August 22, 2018		300,000,000
USD		200,000,000		0.0385	February 20, 2014	February 20, 2024		200,000,000
USD		50,000,000		3M USD Libor + 0.35	January 15, 2014	January 16, 2015		50,000,000
USD		50,000,000		3M USD Libor + 0.28	March 26, 2014	March 27, 2015		50,000,000
USD		20,000,000		3.72	April 9, 2014	April 9, 2024		20,000,000
USD		30,000,000		3.72	April 10, 2014	April 10, 2024		30,000,000
USD		30,000,000		3.7	April 11, 2014	April 11, 2024		30,000,000
USD		50,000,000		3.7	April 11, 2014	April 11, 2024		50,000,000
USD		50,000,000		1.46	April 22, 2014	April 22, 2017		50,000,000
USD		100,000,000		0.52	April 16, 2014	April 17, 2015		100,000,000
USD		24,000,000		0.88	May 16, 2014	May 16, 2016		24,000,000
USD		50,000,000		3M USD Libor + 0.92	August 8, 2013	August 8, 2016		50,000,000
				Subtotal in Original Currency			USD	15,144,000,000
				Subtotal in Equivalent Amount of Won(1)			W	16,646,284,800,000
SGD		36,000,000		0.88	March 21, 2013	March 21, 2016		36,000,000
SGD		30,000,000		3M SGD SOR + 0.165	March 17, 2014	March 19, 2015		30,000,000
				Subtotal in Original Currency			SGD	66,000,000
				Subtotal in Equivalent Amount of Won(2)			W	54,895,500,000
JPY		15,000,000,000		3.22	May 30, 2008	May 30, 2018		15,000,000,000
JPY		2,400,000,000		1.91	October 21, 2011	October 21, 2016		2,400,000,000
JPY		2,000,000,000		1.21	January 30, 2012	January 30, 2015		2,000,000,000
JPY		5,100,000,000		1.17	June 20, 2012	June 19, 2015		5,100,000,000
JPY		3,700,000,000		1.31	June 20, 2012	June 20, 2017		3,700,000,000
JPY		20,000,000,000		0.54	June 7, 2013	June 5, 2015		20,000,000,000
JPY		3,500,000,000		0.66	June 7, 2013	June 7, 2016		3,500,000,000
JPY		6,500,000,000		0.89	June 7, 2013	June 7, 2018		6,500,000,000
JPY		4,500,000,000		0.47	November 11, 2013	November 11, 2015		4,500,000,000
JPY		35,000,000,000		0.43	January 29, 2014	January 29, 2016		35,000,000,000
JPY		15,000,000,000		0.69	January 29, 2014	January 29, 2019		15,000,000,000
JPY		10,100,000,000		0.28	October 24, 2014	October 24, 2016		10,100,000,000
JPY		24,800,000,000		0.35	October 24, 2014	October 24, 2017		24,800,000,000
JPY		3,000,000,000		0.01	May 11, 2011	May 11, 2016		3,000,000,000
JPY		7,000,000,000		0.0136	September 22, 2011	September 23, 2016		7,000,000,000
JPY		3,000,000,000		0.00685	November 7,2012	November 7, 2017		3,000,000,000
JPY		18,000,000,000		0.0038	May 2, 2014	November 2, 2015		18,000,000,000
JPY		7,000,000,000		0.0045	May 2, 2014	May 2, 2017		7,000,000,000
JPY		4,000,000,000		0.2	May 16, 2014	May 18, 2015		4,000,000,000
				Subtotal in Original Currency			JPY	189,600,000,000
				Subtotal in Equivalent Amount of Won(3)			W	1,744,585,440,000

28

Currency	Original Principal Amount		Interest Rate (%)		Issue Date	Maturity Date	Principal Amount Outstanding as of December 31, 2014
HKD		150,000,000		5.00	November 20, 2007	November 20, 2017		150,000,000
HKD		80,000,000		4.71	December 18, 2007	December 18, 2017		80,000,000
HKD		300,000,000		3.25	July 20, 2010	July 20, 2015		300,000,000
HKD		144,000,000		3.30	October 20, 2011	October 20, 2016		144,000,000
HKD		303,000,000		4.30	October 21, 2011	October 21, 2021		303,000,000
HKD		219,000,000		2.40	September 6, 2011	September 6, 2016		219,000,000
HKD		89,000,000		3.60	September 16, 2011	September 16, 2021		89,000,000
HKD		500,000,000		2.80	April 3, 2012	April 3, 2017		500,000,000
HKD		326,000,000		1.40	November 23, 2012	November 23, 2015		326,000,000
HKD		300,000,000		1.82	April 26, 2013	April 26, 2018		300,000,000
HKD		160,000,000		2.28	October 31, 2013	October 31, 2018		160,000,000
HKD		1,042,000,000		3.2	April 3, 2014	October 3, 2021		1,042,000,000
HKD		460,000,000		0.0342	March 15, 2011	March 15, 2016		460,000,000
HKD		388,000,000		0.0442	April 12, 2011	April 12, 2021		388,000,000
HKD		112,000,000		0.0265	October 28, 2011	October 28, 2015		112,000,000
HKD		130,000,000		0.0228	November 4, 2013	November 4, 2018		130,000,000
				Subtotal in Original Currency			HKD	4,703,000,000
				Subtotal in Equivalent Amount of Won(4)			W	666,415,100,000
CNH		1,000,000,000		3.3	June 21, 2012	June 21, 2015		1,000,000,000
CNH		600,000,000		3.3	September 13, 2012	June 21, 2015		600,000,000
CNH		150,000,000		4.45	November 8, 2013	November 8, 2023		150,000,000
CNH		210,000,000		4.1	December 18, 2013	December 18, 2023		210,000,000
				Subtotal in Original Currency			CNH	1,960,000,000
				Subtotal in Equivalent Amount of Won(5)			W	346,547,600,000
EUR		50,000,000		1.015	November 6, 2012	November 6, 2015		50,000,000
EUR		20,000,000		1.17	December 24, 2012	December 15, 2017		20,000,000
EUR		200,000,000		1.50	May 30, 2013	May 30, 2018		200,000,000
EUR		300,000,000		1.50	May 30, 2013	May 30, 2018		300,000,000
EUR		200,000,000		1.50	July 23, 2013	May 30, 2018		200,000,000
EUR		36,000,000		0.00952	October 29, 2013	October 29, 2015		36,000,000
EUR		36,000,000		0.00936	October 30, 2013	October 30, 2015		36,000,000
EUR		25,000,000		0.55	January 17, 2014	March 20, 2015		25,000,000
EUR		30,000,000		3M Euribor + 0.23	April 1, 2014	April 2, 2015		30,000,000
EUR		30,000,000		0.49	May 23, 2014	January 15, 2016		30,000,000
EUR		105,000,000		0.21	September 22, 2014	September 21, 2016		105,000,000
EUR		50,000,000		3M Euribor + 0.235	September 24, 2014	September 24, 2017		50,000,000
EUR		100,000,000		3M Euribor + 0.45	October 28, 2014	October 28, 2019		100,000,000
EUR		100,000,000		3M Euribor + 0.25	May 19, 2014	May 20, 2015		100,000,000
EUR		16,000,000		3M Euribor + 0.45	October 30, 2014	October 30, 2019		16,000,000
				Subtotal in Original Currency			EUR	1,298,000,000
				Subtotal in Equivalent Amount of Won(6)			W	1,734,802,960,000
CHF		180,000,000		1.438	May 23, 2012	May 23, 2016		180,000,000
CHF		180,000,000		1.000	December 21, 2012	December 21, 2018		180,000,000
CHF		100,000,000		0.01375	October 2, 2013	July 2, 2018		100,000,000
CHF		150,000,000		0.01375	October 2, 2013	July 2, 2018		150,000,000
CHF		175,000,000		0.02	July 13, 2011	July 13, 2015		175,000,000
CHF		150,000,000		0.02	October 29, 2012	October 29, 2018		150,000,000
CHF		100,000,000		3M CHF Libor + 0.5	October 29, 2012	October 29, 2015		100,000,000
CHF		20,000,000		0.004625	August 22, 2013	February 22, 2015		20,000,000
CHF		45,000,000		3M CHF Libor + 0.19	January 21, 2014	January 22, 2015		45,000,000
				Subtotal in Original Currency			CHF	1,100,000,000
				Subtotal in Equivalent Amount of Won(7)			W	1,222,573,000,000
BRL		150,000,000		7.35	February 27, 2012	February 27, 2015		150,000,000
BRL		45,500,000		7.02	June 19, 2012	June 21, 2017		45,500,000
BRL		403,000,000		5.81	July 3, 2012	July 2, 2015		403,000,000
				Subtotal in Original Currency			BRL	598,500,000
				Subtotal in Equivalent Amount of Won(8)			W	247,551,570,000
AUD		400,000,000		3M BBSW + 1.15	December 7, 2012	December 7, 2015		400,000,000
AUD		100,000,000		4.50	April 30, 2013	April 30, 2018		100,000,000

29

Currency	Original Principal Amount		Interest Rate (%)		Issue Date	Maturity Date	Principal Amount Outstanding as of December 31, 2014
AUD		20,000,000		4.14	May 16, 2013	May 16, 2016		20,000,000
AUD		25,000,000		3M BBSW + 1.45	July 30, 2013	July 30, 2018		25,000,000
AUD		30,000,000		5.15	July 31, 2013	July 31, 2018		30,000,000
AUD		47,500,000		4.23	September 27, 2013	September 26, 2017		47,500,000
AUD		250,000,000		3M BBSW + 3.05	February 17, 2012	February 17, 2016		250,000,000
AUD		50,000,000		3M BBSW + 1.10	May 22, 2014	November 22, 2019		50,000,000
AUD		150,000,000		3M BBSW + 1.10	May 22, 2014	November 22, 2019		150,000,000
AUD		200,000,000		4.50	May 22, 2014	November 22, 2019		200,000,000
AUD		300,000,000		3M BBSW + 1.27	June 5, 2013	June 5, 2017		300,000,000
				Subtotal in Original Currency			AUD	1,572,500,000
				Subtotal in Equivalent Amount of Won(9)			W	1,413,819,025,000
MYR		300,000,000		4.05	February 24, 2012	February 24, 2016		300,000,000
MYR		200,000,000		4.10	February 24, 2012	February 24, 2017		200,000,000
				Subtotal in Original Currency			MYR	500,000,000
				Subtotal in Equivalent Amount of Won(10)			W	157,120,000,000
MXN		144,000,000		4.78	September 27, 2013	September 26, 2017		144,000,000
				Subtotal in Original Currency			MXN	144,000,000
				Subtotal in Equivalent Amount of Won(11)			W	10,740,960,000
NOK		300,000,000		4.00	October 23, 2013	April 23, 2020		300,000,000
				Subtotal in Original Currency			NOK	300,000,000
				Subtotal in Equivalent Amount of Won(12)			W	44,373,000,000
ZAR		822,000,000		7.76	September 27, 2013	September 26, 2017		822,000,000
				Subtotal in Original Currency			ZAR	822,000,000
				Subtotal in Equivalent Amount of Won(13)			W	78,098,220,000
TRY		323,900,000		8.35	June 19, 2012	June 18, 2015		323,900,000
				Subtotal in Original Currency			TRY	323,900,000
				Subtotal in Equivalent Amount of Won(14)			W	152,874,322,000
NZD		100,000,000		5.25	April 3, 2014	April 3, 2018		100,000,000
NZD		100,000,000		5.125	November 13, 2014	November 13, 2020		100,000,000
				Subtotal in Original Currency			NZD	200,000,000
				Subtotal in Equivalent Amount of Won(15)			W	172,102,000,000
GBP		100,000,000		2.00	November 20, 2014	December 20, 2018		100,000,000
GBP		150,000,000		2.00	November 20, 2014	December 20, 2018		150,000,000
				Subtotal in Original Currency			GBP	250,000,000
				Subtotal in Equivalent Amount of Won(16)			W	427,617,500,000
Total External Bonds of KDB in Equivalent Amount of Won							W	25,120,400,997,000

(1) U.S. dollar amounts are converted to Won amounts at the rate of US$1.00 to Won 1,099.20, the market average exchange rate in effect on December 31, 2014, as announced by Seoul Money Brokerage Services, Ltd.

(2) Singapore dollar amounts are converted to Won amounts at the rate of SGD 1.00 to Won 831.75, the market average exchange rate in effect on December 31, 2014, as announced by Seoul Money Brokerage Services, Ltd.

(3) Japanese yen amounts are converted to Won amounts at the rate of JPY 100.00 to Won 920.14, the market average exchange rate in effect on December 31, 2014, as announced by Seoul Money Brokerage Services, Ltd.

(4) Hong Kong dollar amounts are converted to Won amounts at the rate of HKD 1.00 to Won 141.70, the market average exchange rate in effect on December 31, 2014, as announced by Seoul Money Brokerage Services, Ltd.

(5) Chinese offshore renminbi amounts are converted to Won amounts at the rate of CNH 1.00 to Won 176.81, the market average exchange rate in effect on December 31, 2014, as announced by Seoul Money Brokerage Services, Ltd.

(6) Euro amounts are converted to Won amounts at the rate of EUR 1.00 to Won 1,336.52, the market average exchange rate in effect on December 31, 2014, as announced by Seoul Money Brokerage Services, Ltd.

(7) Swiss franc amounts are converted to Won amounts at the rate of CHF 1.00 to Won 1,111.43, the market average exchange rate in effect on December 31, 2014, as announced by Seoul Money Brokerage Services, Ltd.

(8) Brazilian real amounts are converted to Won amounts at the rate of BRL 1.00 to Won 413.62, the prevailing market rate on December 31, 2014.

30

(9) Australian dollar amounts are converted to Won amounts at the rate of AUD 1.00 to Won 889.09, the market average exchange rate in effect on December 31, 2014, as announced by Seoul Money Brokerage Services, Ltd.

(10) Malaysian ringgit amounts are converted to Won amounts at the rate of MYR 1.00 to Won 314.24, the market average exchange rate in effect on December 31, 2014, as announced by Seoul Money Brokerage Services, Ltd.

(11) Mexican Peso amounts are converted to Won amounts at the rate of MXN 1.00 to Won 74.59, the market average exchange rate in effect on December 31, 2014, as announced by Seoul Money Brokerage Services, Ltd.

(12) Norwegian Krone amounts are converted to Won amounts at the rate of NOK 1.00 to Won 147.91, the market average exchange rate in effect on December 31, 2014, as announced by Seoul Money Brokerage Services, Ltd.

(13) South African Rand amounts are converted to Won amounts at the rate of ZAR 1.00 to Won 95.01, the market average exchange rate in effect on December 31, 2014, as announced by Seoul Money Brokerage Services, Ltd.

(14) Turkish lira amounts are converted to Won amounts at the rate of TRY 1.00 to Won 471.98, the market average exchange rate in effect on December 31, 2014, as announced by Seoul Money Brokerage Services, Ltd.

(15) New Zealand dollar amounts are converted to Won amounts at the rate of NZD 1.00 to Won 860.51, the market average exchange rate in effect on December 31, 2014, as announced by Seoul Money Brokerage Services, Ltd.

(16) Great Britain Sterling amounts are converted to Won amounts at the rate of GBP 1.00 to Won 1,710.47, the market average exchange rate in effect on December 31, 2014, as announced by Seoul Money Brokerage Services, Ltd.

(2) External Borrowings of KDB

Lender	Classifications	Range of Interest Rates		Range of Years of Issue		Range of Years of Maturity		Principal Amount Outstanding as of December 31, 2014(1)
		(%)						(millions of Won)
JBIC	Borrowings from JBIC		1.44~2.16		2009~2012		2015~2025		218,227
Mizuho and others	Borrowings from foreign banks		3M Libor + 0.40~1.95		2009~2013		2015~2016		1,209,120
Ministry of Strategy and Finance	Exchange equalization fund borrowings in foreign currencies		3M Libor + 0.35~0.69		2014		2017~2029		1,015,786
Citi Bank and others	Off-shore short-term borrowings		0.19~3m telerate+0.50		2014		2015		1,134,665
BNP Paribas and others	Off-shore long-term borrowings		3MLibor+0.30~+0.75		2012~2013		2015~2016		683,543
JBIC	Off-shore borrowings from JBIC		1.79~6m Libor+1.20		2010~2012		2015~2022		105,531
Others	Short-term borrowings in foreign currency		0.02~6.65		2014		2015		5,767,387
	Long-term borrowings in foreign currency		0.10~6.50		2011~2013		2015~2016		2,005,352
Total External Borrowings of KDB								W	12,139,611

(1) Converted to Won amounts at the relevant market average exchange rates in effect on December 31, 2014 as announced by Seoul Money Brokerage Services, Ltd.

31

B. Internal Debt of KDB

Title	Range of Interest Rates		Range of Years of Issue		Range of Years of Original Maturity		Principal Amounts Outstanding as of December 31, 2014
	(%)						(millions of Won)
1. Bonds
Short-term Industrial Finance Bonds		2.06 ~ 4.38		2010~2014		2010~2015		11
Long-term Industrial Finance Bonds		2.03~12.00		2004~2014		2010~2033		89,591,160
Total Bonds		2.03~12.00		2004~2014		2010~2033		89,591,171
2. Borrowings
Borrowings from the Ministry of Strategy and Finance		1.46~5.00		1994~2012		2015~2032	W	495,587
Borrowings from Industrial Bank of Korea		0.77~2.40		2006~2008		2015~2016		3,092
Borrowings from Small Business Corp.		1.52~3.91		2004~2013		2015~2023		248,825
Borrowings from the Ministry of Culture and Tourism		0.21~2.50		2005~2013		2015~2023		1,490,344
Borrowings from Korea Energy Management Corporation		0.25~3.75		1999~2013		2015~2028		1,151,113
Others		0.00~5.05		1999~2013		2015~2044		4,065,862
Total Borrowings(1)								7,454,823
3. Other Debt(2)								2,395,925
Total Internal Floating Debt(3)								1,460,011
Total Internal Funded Debt(4)								97,981,908
Total Internal Debt							W	99,441,919

(1) Consist of short term borrowings in the amount of W3,724,610 million and long term borrowings in the amount of W3,730,213 million.

(2) Other debt includes bonds sold under repurchase agreements and call money.

(3) Floating debt is debt that has a maturity at issuance of less than one year.

(4) Funded debt is debt that has a maturity at issuance of one year or more.

Financial Statements and the Auditors

The Governmentelects our Auditor who is responsible for examining our financial operations and auditing our financial statements and records. The present Auditor is Hyung-Chul Shin, who was appointed by the Financial Services Commission for a three-year term on April 11, 2014.

We prepare our financial statements annually for submission to the Financial Services Commission, accompanied by an opinion of the Auditor. Although we are not legally required to have financial statements audited by external independent auditors, an independent public accounting firm has audited our separate and consolidated financial statements commencing with such financial statements as of and for the year ended December 31, 1998. As of the date of this prospectus, our external independent auditor is KPMG Samjong Accounting Corp., located at 10th Floor, Star Tower, 152, Teheran-ro, Gangnam-gu, Seoul, Korea, which has audited our separate financial statements as of and for the years ended December 31, 2014 and 2013 included in this prospectus.

Our separate financial statements appearing in this prospectus were prepared in conformity with Korean IFRS, as summarized in “—Financial Statements and the Auditors—Notes to Separate Financial Statements of December 31, 2014 and 2013—Note 2.” These principles and procedures differ in certain material respects from generally accepted accounting principles in the United States.

32

We generally record our debt securities investments, except for our trading portfolio of marketable debt securities, at the cost of acquisition (including incidental expenses related to purchase), computed on the specific identification method. We record our trading portfolio of marketable debt securities at market value. Starting in April 1999, we record all our debt securities investments at market value except for debt securities invested with the intention of holding until maturity, which we record at the cost of acquisition or amortized cost.

We record the value of our premises and equipment on our statements of financial position on the basis of a revaluation conducted as of July 1, 1998. The Minister of Strategy and Finance approved the revaluation in accordance with applicable Korean law. We value additions to premises and equipment since such date at cost.

33

Independent Auditors’ Report

The Board of Directors and Shareholders

Korea Development Bank

We have audited the accompanying separate financial statements of Korea Development Bank (the “Bank”), which comprise the separate statements of financial position as at December 31, 2014 and 2013, the separate statements of comprehensive income (loss), changes in equity and cash flows for the years then ended, and notes, comprising a summary of significant accounting policies and other explanatory information.

Management’s Responsibilities for the Separate Financial Statements

Management is responsible for the preparation and fair presentation of these separate financial statements in accordance with Korean International Financial Reporting Standards, and for such internal control as management determines is necessary to enable the preparation of separate financial statements that are free from material misstatement, whether due to fraud or error.

Auditors’ Responsibility

Our responsibility is to express an opinion on these separate financial statements based on our audits. We conducted our audits in accordance with Korean Standards on Auditing. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the separate financial statements. The procedures selected depend on our judgment, including the assessment of the risks of material misstatement of the separate financial statements, whether due to fraud or error. In making those risk assessments, We consider internal control relevant to the entity’s preparation and fair presentation of the separate financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the separate financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Opinion

In our opinion, the separate financial statements present fairly, in all material respects, the separate financial position of the Bank as of December 31, 2014 and 2013 and its separate financial performance and its separate cash flows for the years then ended in accordance with Korean International Financial Reporting Standards.

Emphasis of Matter

Without qualifying our opinion, we draw attention to Note 47 to the separate financial statements which states that KDB Financial Group Inc. and Korea Finance Corporation merged into the Bank, effective as of December 31, 2014. After the merger, the Bank is the merged entity, which is the surviving entity, while both KDB Financial Group Inc. and Korea Finance Corporation ceased to exist.

34

Other Matters

The accompanying separate statement of financial position of the Bank as of December 31, 2013, and the related separate statements of comprehensive loss, changes in equity and cash flows for the year then ended, were audited by us in accordance with the previous auditing standards generally accepted in Republic of Korea.

The procedures and practices utilized in the Republic of Korea to audit such separate financial statements may differ from those generally accepted and applied in other countries.

/s/ KPMG Samjong Accounting Corp.

KPMG Samjong Accounting Corp.

Seoul, Korea

March 25, 2015

This report is effective as of March 25, 2015, the audit report date. Certain subsequent events or circumstances, which may occur between the audit report date and the time of reading this report, could have a material impact on the accompanying separate financial statements and notes thereto. Accordingly, the readers of the audit report should understand that the above audit report has not been updated to reflect the impact of such subsequent events or circumstances, if any.

35

Korea Development Bank

Separate Statements of Financial Position

As of December 31, 2014 and 2013

(In millions of won)	Notes		December 31, 2014		December 31, 2013
Assets
Cash and due from banks		4,43,44,47,48	W	5,974,543		5,710,337
Financial assets held for trading		5,43,44,48		1,418,398		1,425,653
Available-for-sale financial assets		6,43,44,47,48		38,160,025		25,534,233
Held-to-maturity financial assets		7,43,44,48		17,238		27,109
Loans		8,43,44,47,48		134,314,466		96,308,413
Derivative financial assets		9,43,44,45,47,48		4,912,792		4,319,272
Investments in subsidiaries and associates		10,46,47		26,858,662		4,971,662
Property and equipment, net		11,46,47		535,814		439,760
Investment property, net		12,46,47		74,639		80,695
Intangible assets, net		13,46,47		90,844		85,651
Deferred tax assets		34,47		19,390		534,783
Other assets		14,43,47,48		5,456,358		4,169,902
Total assets			W	217,833,169		143,607,470
Liabilities
Financial liabilities designated at fair value through profit or loss		15,43,44,48	W	1,138,628		677,916
Deposits		16,43,44,48		37,605,714		37,727,270
Borrowings		17,43,44,47,48		23,537,531		23,220,773
Bonds		18,43,44,47,48		116,569,796		55,924,868
Derivative financial liabilities		9,43,44,45,47,48		4,789,154		3,880,101
Defined benefit liabilities		19,47		32,130		25,166
Provisions		20,47		311,825		540,085
Deferred tax liabilities		34,47		1,998,496		—
Income taxes payable				215,511		19,240
Other liabilities		21,43,47,48		6,221,781		5,245,951
Total liabilities				192,420,566		127,261,370
Equity
Issued capital		22		15,180,399		9,261,861
Capital surplus		22		2,522,869		44,373
Capital adjustments		22		—		(51	)
Accumulated other comprehensive income		22		818,422		332,473
Retained earnings		22		6,890,913		6,707,444
(Regulatory reserve for loan losses of W1,306,925 and W1,306,925 as of December 31, 2014 and 2013, respectively)
(Non-accumulated reserve for credit losses were amounted to W17,152 and W0 as of December 31, 2014 and 2013, respectively)
(Obligated amount of provision for regulatory reserve for loan losses of W46,751 and W17,152 as of December 31, 2014 and 2013, respectively)
(Planned regulatory reserve for loan losses of W63,903 and W0 as of December 31, 2014 and 2013, respectively)
Total equity				25,412,603		16,346,100
Total liabilities and equity			W	217,833,169		143,607,470

See accompanying notes to the separate financial statements.

36

Korea Development Bank

Separate Statements of Comprehensive Income (Loss)

For the years ended December 31, 2014 and 2013

(In millions of won, except earnings per share information)	Notes		2014			2013
Interest income		23	W	4,750,441			4,766,552
Interest expense		23		(2,761,947	)		(3,036,087	)
Net interest income				1,988,494			1,730,465
Net fees and commission income		24		442,244			453,734
Dividend income		25		158,164			137,869
Net loss on financial instruments held-for-trading		26		(6,324	)		(14,351	)
Net gain (loss) on financial instruments designated at fair value through profit and loss		27		(72,665	)		45,571
Net gain (loss) on available-for-sale financial assets		28		49,056			(200,851	)
Net gain (loss) on derivatives		29		(319,618	)		251,279
Net foreign currency transaction gain (loss)		30		384,669			(252,881	)
Other operating income (loss), net		31		14,228			(850,583	)
Non-interest income (loss), net				649,754			(430,213	)
Provision for loan losses		8		1,656,759			1,611,502
General and administrative expenses		32		556,800			546,875
Operating income (loss)		46		424,689			(858,125	)
Impairment loss on investments in subsidiaries and associates		10		(211,086	)		(1,095,391	)
Other non-operating income		33		13,816			7,953
Other non-operating expense		33		(10,608	)		(17,722	)
Non-operating expense, net				(207,878	)		(1,105,160	)
Profit (loss) before income taxes				216,811			(1,963,285	)
Income tax expense (benefit)		34		33,342			(515,894	)
Profit (loss) for the year				183,469			(1,447,391	)
(Profit (loss) for the year adjusted for regulatory reserve for loan losses : W136,718 million and (-)W1,464,543 million for the years ended December 31, 2014 and 2013)
Other comprehensive income (loss) for the year, net of tax Items that are or may be reclassified subsequently to profit or loss:
Valuation gain (loss) on available-for-sale financial assets, net				48,777			(197,006	)
Exchange differences on translation of foreign operations				21,302			(12,282	)
Valuation loss on cash flow hedge				(1,023	)		—
Items that will not be reclassified to profit or loss:
Remeasurements of defined benefit liabilities				25,442			7,580
				94,498			(201,708	)
Total comprehensive income (loss) for the year			W	277,967			(1,649,099	)
Earnings (loss) per share
Basic and diluted earnings (loss) per share (in won)		35	W	99			(782	)

See accompanying notes to the separate financial statements.

37

Korea Development Bank

Separate Statements of Changes in Equity

For the years ended December 31, 2014 and 2013

(In millions of won)	Issued capital		Capital surplus		Capital adjustment			Accumulated other comprehensive income			Retained earnings			Total equity
Balance at January 1, 2013	W	9,251,861		44,373		—			534,181			8,387,982			18,218,397
Loss for the year		—		—		—			—			(1,447,391	)		(1,447,391	)
Changes in valuation loss on available-for-sale financial assets		—		—		—			(197,006	)		—			(197,006	)
Changes in exchange differences on translation of foreign operations		—		—		—			(12,282	)		—			(12,282	)
Changes in remeasurements of defined benefit liabilities		—		—		—			7,580			—			7,580
Total comprehensive loss for the year		—		—		—			(201,708	)		(1,447,391	)		(1,649,099	)
Dividends		—		—		—			—			(233,147	)		(233,147	)
Paid in capital increase		10,000		—		(51	)		—			—			9,949
Transaction with owners		10,000		—		(51	)		—			(233,147	)		(223,198	)
Balance at December 31, 2013	W	9,261,861		44,373		(51	)		332,473			6,707,444			16,346,100
Balance at January 1, 2014	W	9,261,861		44,373		(51	)		332,473			6,707,444			16,346,100
Profit for the year		—		—		—			—			183,469			183,469
Changes in valuation gain on available-for-sale financial assets		—		—		—			48,777			—			48,777
Changes in exchange differences on translation of foreign operations		—		—		—			21,302			—			21,302
Changes in valuation loss on cash flow hedge		—		—		—			(1,023	)		—			(1,023	)
Changes in remeasurements of defined benefit liabilities		—		—		—			25,442			—			25,442
Total comprehensive income for the year		—		—		—			94,498			183,469			277,967
Paid in capital increase		20,000		—		(100	)		—			—			19,900
Merger with controlling entities (Note 47)		5,898,538		2,478,496		151			391,451			—			8,768,636
Transaction with owners		5,918,538		2,478,496		51			391,451			—			8,788,536
Balance at December 31, 2014	W	15,180,399		2,522,869		—			818,422			6,890,913			25,412,603

See accompanying notes to the separate financial statements.

38

Korea Development Bank

Separate Statements of Cash Flows

For the years ended December 31, 2014 and 2013

(In millions of won)	Notes		2014			2013
Cash flows from operating activities
Profit (loss) for the year			W	183,469			(1,447,391	)
Adjustments for:
Income tax expense (benefit)		34		33,342			(515,894	)
Interest income		23		(4,750,441	)		(4,766,552	)
Interest expense		23		2,761,947			3,036,087
Dividend income		25		(158,164	)		(137,869	)
Loss (gain) on valuation of financial assets held for trading		26		(96	)		2,130
Loss (gain) on valuation of financial liabilities designated at fair value through profit or loss		27		73,092			(43,084	)
Gain on disposal of available-for-sale financial assets		28		(383,221	)		(414,712	)
Impairment loss on available-for-sale financial assets		28		334,165			615,563
Loss on valuation of derivatives		29		349,289			416,488
Net gain on fair value hedged items		29		(110,621	)		(611,966	)
Loss (gain) on foreign exchange translations		30		(272,816	)		223,343
Gain on disposal of investments in subsidiaries and associates		31		(4,839	)		(237	)
Impairment loss on investments in subsidiaries and associates		10		211,086			1,095,391
Provision for loan losses		8		1,656,759			1,611,502
Increase (reversal) of provision for payment guarantees		20,31		(269,485	)		461,859
Reversal of provision for unused commitments		20,31		(6,961	)		(11,208	)
Increase (reversal) of provision for possible losses from lawsuits		20,31		7,162			(19	)
Defined benefit costs		19,32		34,705			36,755
Depreciation of property and equipment		11,32		26,547			26,987
Gain on disposal of property and equipment		33		(8,407	)		(315	)
Depreciation of investment property		12,33		1,559			1,693
Amortization of intangible assets		13,32		24,671			19,347
Impairment loss on intangible assets		13,33		738			—
Other operating loss, net				2,417			2,535
Loss (gain) on redemption of debentures				21			(11	)
				(447,551	)		1,047,813
Changes in operating assets and liabilities:
Due from banks				612,464			(1,492,439	)
Financial assets held for trading				(32,786	)		537,525
Loans				(12,720,448	)		(8,088,537	)
Derivative financial assets				3,131,856			3,249,718
Other assets				64,893			6,029,923
Financial liabilities designated at fair value through profit or loss				387,620			(154,198	)
Deposits				2,967,543			(1,067,586	)
Derivative financial liabilities				(3,206,500	)		(3,014,343	)
Defined benefit liabilities				(5,400	)		(20,473	)
Other liabilities				436,429			(6,467,782	)
				(8,364,329	)		(10,488,192	)
Income taxes paid				(32,664	)		(94,708	)
Interest received				4,721,132			4,906,737
Interest paid				(2,622,194	)		(3,232,464	)
Dividends received				158,164			195,210
Net cash used in operating activities			W	(6,403,973	)		(9,112,995	)

39

Korea Development Bank

Separate Statements of Cash Flows—(Continued)

For the years ended December 31, 2014 and 2013

(In millions of won)	Notes		2014			2013
Cash flows from investing activities
Disposal of available-for-sale financial assets		6	W	26,104,387			28,509,101
Acquisition of available-for-sale financial assets		6		(23,942,377	)		(29,488,413	)
Redemption of held-to-maturity financial assets		7		21,146			62,375
Acquisition of held-to-maturity financial assets		7		(11,465	)		(379	)
Disposal of property and equipment		11		11,229			1,316
Acquisition of property and equipment		11		(38,411	)		(18,692	)
Disposal of intangible assets		13		211			5
Acquisition of intangible assets		13		(16,740	)		(33,518	)
Disposal of investments in subsidiaries and associates				180,326			105,316
Acquisition of investments in subsidiaries and associates				(371,403	)		(184,486	)
Net cash provided by (used in) investing activities				1,936,903			(1,047,375	)
Cash flows from financing activities
Proceeds from borrowings				38,025,988			45,555,768
Repayment of borrowings				(40,206,113	)		(43,644,061	)
Proceeds from issuance of bonds				28,764,309			26,779,601
Repayment of bonds				(20,526,376	)		(16,944,191	)
Paid in capital increase				19,900			9,949
Dividends paid		22		—			(233,147	)
Consideration transferred in the acquisition		47		(7,309	)		—
Net cash provided by financing activities				6,070,399			11,523,919
Effects from changes in foreign currency exchange rate for cash and cash equivalents held				256,621			170,912
Net increase in cash and cash equivalents				1,859,950			1,534,461
Cash and cash equivalents at beginning of year				7,159,964			5,625,503
Cash and cash equivalents at end of year		41	W	9,019,914			7,159,964

See accompanying notes to the separate financial statements.

40

Korea Development Bank

Notes to the Separate Financial Statements

For the years ended December 31, 2014 and 2013

1. Reporting Entity

Korea Development Bank (the “Bank”) was established on April 1, 1954, in accordance with The Korea Development Bank Act to finance and manage major industrial projects.

The Bank is engaged in the banking industry under The Korea Development Bank Act and other applicable statutes, and in the fiduciary in accordance with the Financial Investment Services and Capital Markets Act.

Korea Finance Corporation (KoFC), the former ultimate parent company, and KDB Financial Group Inc. (KDBFG), the former immediate parent company, were established by spin-offs of divisions of the Bank as of October 28, 2009. KoFC and KDBFG merged into the Bank, effective as of December 31, 2014. Issued capital is W15,180,399 million with 3,036,079,768 shares of issued and outstanding as of December 31, 2014 and 100% of the Bank’s shares are owned the government of the Republic of Korea.

The Bank’s head office is located in Yeouido-dong, Yeongdeungpo-gu, Seoul and its service network as of December 31, 2014 is as follows:

	Domestic				Overseas
	Head Office		Branches		Branches		Subsidiaries		Representative offices		Total
KDB		1		82		8		5		7		103

2. Basis of Preparation

(1) Statement of compliance

The financial statements have been prepared in accordance with the Korean International Financial Reporting Standards (“K-IFRS”), as prescribed in the Act on External Audits of Corporations in the Republic of Korea.

These financial statements are separate financial statements prepared in accordance with K-IFRS No.1027 ‘Separate Financial Statements’ presented by a parent, a parent, an investor with joint control of, or significant influence over, an investee, in which the investments are accounted for at cost.

(2) Basis of measurement

The financial statements have been prepared on the historical cost basis except for the following material items in the statement of financial position:

• Derivative financial instruments measured at fair value

• Financial instruments measured at fair value through profit or loss

• Available-for-sale financial instruments measured at fair value

• Fair value hedged financial instruments with changes in fair value, due to hedged risks, recognized in profit or loss

• Liabilities for defined benefit plans, which are recognized as net of the total present value of defined benefit obligations less the fair value of plan assets and unrecognized past service costs

41

Korea Development Bank

Notes to the Separate Financial Statements—(Continued)

For the years ended December 31, 2014 and 2013

(3) Functional and presentation currency

These financial statements are presented in Korean won (“W”), which is the Bank’s functional currency and the currency of the primary economic environment in which the Bank operates.

(4) Use of estimates and judgments

The preparation of the financial statements in conformity with K-IFRS requires management to make judgments, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates.

Estimates and underlying assumptions are evaluated on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimates are revised and in any future periods affected.

Information about critical judgments made by management in applying the Bank’s accounting policies that have the most significant effect on the amounts recognized in the separate financial statements is included in the following notes:

• Note 3.(7)—Impairment of financial assets

• Note 3.(16)—Employee benefits

Information about assumptions and estimation uncertainties that have a significant risk of resulting in a material adjustment within the next financial year is included in the following notes:

• Note 8—Loans and allowance for loan losses

• Note 19—Defined benefit liabilities

• Note 20—Provisions

(5) Approval date for the separate financial statements

The separate financial statements were authorized for issue by the Board of Directors on March 13, 2015, which will be submitted for approval to the shareholders’ meeting to be held on March 30, 2015.

3. Significant Accounting Policies

The significant accounting policies applied by the Bank in preparation of its separate financial statements are included below. The accounting policies set out below have been applied consistently to all periods presented in these separate financial statements.

(1) Investments in subsidiaries and associates

The accompanying financial statements are separate financial statements in accordance with K-IFRS No.1027 ‘Separate Financial Statements’ and investments in subsidiaries and associates are accounted for at cost, not by performance and net asset reported by the investee. Dividends received from subsidiaries and associates are recognized as income as of the time the right to receive the dividends is established.

42

Korea Development Bank

Notes to the Separate Financial Statements—(Continued)

For the years ended December 31, 2014 and 2013

(2) Business combination of entities under common control

The assets and liabilities acquired under business combinations under common control are recognized at the carrying amounts recognized previously in the consolidated financial statements of the ultimate parent. The difference between consideration transferred and carrying amounts of net assets acquired is recognized as part of share premium.

(3) Operating segments

The Bank makes decisions regarding allocation of resources to segments and categorizes segments, based on internal reports reviewed periodically by the chief operating decision maker, to assess performance. Information on segments reported to the chief operating decision maker includes items directly attributable to segments as well as those that can be allocated on a reasonable basis. Unallocated items mainly comprise corporate assets (such as the Bank Headquarters), head office expenses, and income tax assets and liabilities. The Bank recognizes the CEO as the chief operating decision maker.

(4) Foreign currency

(i) Foreign currency transactions

Transactions in foreign currencies are translated to the functional currency of the Bank, at exchange rates of the dates of transactions. Monetary assets and liabilities denominated in foreign currencies at the reporting date are translated to the functional currency at the exchange rate at that date. The foreign currency gain or loss on monetary items is the difference between amortized cost in the functional currency at the beginning of the period, adjusted for effective interest and payments during the period, and the amortized cost in foreign currency translated at the exchange rate at the end of the reporting period. Non-monetary assets and liabilities denominated in foreign currencies that are measured at fair value are translated to the functional currency at the exchange rate at the date that the fair value was determined.

Foreign currency differences arising on translation are recognized in profit or loss, except for differences arising on the translation of available for sale equity instruments, a financial liability designated as a hedge of the net investment in a foreign operation, or in a qualifying cash flow hedge, which are recognized in other comprehensive income. Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rate at the date of the transaction.

(ii) Foreign operations

If the presentation currency of the Bank is different from a foreign operation’s functional currency, the financial statements of the foreign operation are translated into the presentation currency using the following methods:

Unless the functional currency of foreign operations is in a state of hyper inflation, assets and liabilities of foreign operations are translated at the closing exchange rate at the end of the reporting period. Revenues and expenses on the statement of comprehensive income are translated at the exchange rates of the date of transaction. Foreign currency differences that arise from translation are recognized as other comprehensive income, and the disposal of a foreign operation is re-categorized as profit or loss as of the moment the disposal profit or loss is recognized.

43

Korea Development Bank

Notes to the Separate Financial Statements—(Continued)

For the years ended December 31, 2014 and 2013

Any goodwill arising on the acquisition of a foreign operation, and any adjustments in fair value to the carrying amounts of assets and liabilities due to such acquisition, are treated as assets and liabilities of the foreign operation. Therefore, such are expressed in the functional currency of the foreign operations and, alongside other assets and liabilities of the foreign operation, translated at the closing exchange rate.

In the case of the disposal of a foreign operation, cumulative amounts of exchange difference regarding the foreign operation, recognized separately from other comprehensive income, are re-categorized from assets to profit or loss as of the moment the disposal profit or loss is recognized.

(iii) Foreign exchange of net investment in foreign operations

Monetary items receivable from or payable to a foreign operation, with none or little possibility of being settled in the foreseeable future, are considered a part of the net investment in the foreign operation. Therefore, the exchange difference is recognized as comprehensive profit or loss in the financial statement, and re-categorized to profit or loss as of the disposal of the related net investment.

(5) Cash and cash equivalents

Cash and cash equivalents comprise balances with original maturities of three months or less from the date of acquisition that are subject to an insignificant risk of changes in their fair value, including cash on hand, deposits held at call with banks and other highly liquid short-term investments with original maturities of three months or less.

(6) Non-derivative financial assets

The Bank recognizes and measures non-derivative financial assets by the following four categories: financial assets at fair value through profit or loss, held-to-maturity financial assets, loans and receivables, and available-for-sale financial assets. Moreover, the Bank recognizes financial assets in the statement of financial position as of the time the Bank becomes a party to the contractual provisions of the instruments.

Non-derivative financial assets are measured at fair value upon initial recognition and, unless designated at fair value through profit or loss, transaction costs directly regarding acquisition and issuance of such assets are summed to the initial fair value.

(i) Financial assets at fair value through profit or loss

Any financial asset classified as held-for-trading or designated at fair value through profit or loss at initial recognition is categorized under financial assets at fair value through profit or loss. Financial assets at fair value through profit or loss (“FVTPL”) are measured at fair value upon initial recognition, and changes therein are recognized as profit or loss. Furthermore, transaction costs regarding acquisition upon initial recognition are recognized as profit or loss as incurred.

(ii) Held-to-maturity financial assets

If a non-derivative financial asset has a fixed maturity with a fixed or determinable payment, and the Bank has positive intent and ability to hold such an asset, it is classified as held-to-maturity financial assets. Subsequent to initial recognition, held-to-maturity financial assets are measured at amortized costs using the effective interest rate (“EIR”) method.

44

Korea Development Bank

Notes to the Separate Financial Statements—(Continued)

For the years ended December 31, 2014 and 2013

(iii) Loans and receivables

Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. Subsequent to initial recognition, loans and receivables are measured at amortized cost using the effective interest rate method. Furthermore, the effective interest rate method is applied to recognize interest incomes on financial investments, except short-term loans and receivables, in which case the impact of effective interest the method is immaterial.

(iv) Available-for-sale financial assets

Any non-derivative financial asset, not classified as financial assets at fair value through profit or loss, held-to-maturity financial assets, or loans and receivables, is classified as available-for-sale financial assets. Subsequent to initial recognition, such assets are measured at fair value. However, equity instruments that do not have a quoted market price in an active market and cannot be reliably measured, and any derivatives that are linked to these instruments and need to be settled upon the delivery of such equity instruments are measured at cost. Accumulated other comprehensive income, reflected in equity as fair value changes, is recognized as profit or loss as of the time the related available-for-sale asset is disposed of or the impairment loss is recognized. Furthermore, dividends earned whilst holding available-for-sale financial assets are recognized in the statement of comprehensive income upon the establishment of the right to receive the payment.

(v) De-recognition of financial assets

The Bank de-recognizes a financial asset when the rights to receive cash flow from an asset expire, or when it transfers the rights to receive cash flow and substantially all the risks and rewards from the ownership of a financial asset. In the case that the Bank has neither transferred nor retained substantially all the risks and rewards of an asset, the Bank de-recognizes any assets if it does not have control, and recognizes any assets to the extent of the Bank’s continuing involvement if it does have control. In the latter case, any associated liabilities are recognized by the Bank. In the case the Bank retains substantially all the risks and rewards from the ownership of an asset it does not have control of, the Bank continues to recognize the financial asset, and recognizes consideration received as financial liabilities.

(vi) Offsetting between financial assets and financial liabilities

Financial assets and liabilities are set-off only under the conditions that the Bank has legal rights to set-off the recognized amounts, and the intention to settle on a net basis or to realize assets and settle liabilities at the same time.

(7) Impairment of financial assets

The Bank assesses the possibility of objective evidence that may indicate any impairment of financial assets, except those designated at fair value through profit or loss, at each reporting date. A financial asset is defined as impaired if, as a result of one or more events after initial recognition, the estimated future cash flow of the asset has been affected. However, expected impairments from future events are not recognized, regardless of their likelihood.

45

Korea Development Bank

Notes to the Separate Financial Statements—(Continued)

For the years ended December 31, 2014 and 2013

Upon the finding of objective evidence to believe an asset is impaired, the impairment is measured and recognized in profit or loss as follows, according to the asset category:

(i) Impairment of loans and receivables

The Bank assesses, at each reporting date, whether objective evidence that indicate impairment of loans and receivables exist. If objective evidence shows that believe impairment has occurred, the amount of the loss is measured as the difference between the carrying amount of the asset and the present value of estimated future cash flows, discounted using the initial effective interest rate (“EIR”). Furthermore, the carrying amount of the asset is reduced through the use of an allowance account and the amount of the loss is recognized in the statement of comprehensive income.

All individually significant loans and advances are assessed for specific impairment. Those found not to be specifically impaired are then collectively assessed for any impairment that has been incurred but not yet identified. Loans and advances that are not individually significant are collectively assessed for impairment by grouping together loans and advances with similar risk characteristics.

In individual assessment, allowances on losses are computed using the discounted expected recoverable value, estimated by operating cash flows or collateral cash flow; in collective assessment, allowances on losses are computed using statistical methods based on obtainable historical loss experience.

The present value of estimated future cash flows is measured using the asset’s initial EIR. If the loan has a floating interest rate, the Bank uses the current EIR for the measurement. Future cash flows from collateral are estimated at net cash flow from disposal of collateral (deducting transaction cost).

For the purpose of a collective assessment of impairment, assets are analyzed on the basis of the Bank’s internal credit rating system that considers credit risk characteristics such as asset type, industry, geographical location, collateral type, past-due status and other relevant factors.

Future cash flows of the assets collectively assessed are estimated on the basis of historical loss experience for loans with similar credit risk characteristics. Historical loss experience is adjusted on the basis of current observable data to reflect the effects of current conditions on which the historical loss experience is based, and to remove the effects of conditions in the historical period that no longer exist. Estimates of changes in future cash flows reflect, and are directionally consistent with, changes in related observable data from year to year (such as changes in unemployment rates, property prices, commodity prices, payment status, or other factors that are indicative of incurred loss in the Bank and their magnitude). The methodology and assumptions used for estimating future cash flows are reviewed regularly to reduce any differences between loss estimates and actual loss experience.

If the terms of a financial asset are renegotiated or modified or an existing financial asset is replaced with a new one due to financial difficulties of the borrower, then an assessment is made of whether the financial asset should be de recognised. If the cash flows of the renegotiated asset are substantially different, then the contractual rights to cash flows from the original financial asset are deemed to have expired. In this case, the original financial asset is derecognised and the new financial asset is recognised at fair value. The impairment loss before an expected restructuring is measured as follows:

• If the expected restructuring will not result in derecognition of the existing asset, then the estimated cash flows arising from the modified financial asset are included in the measurement of the existing asset based on their expected timing and amounts discounted at the original effective interest rate of the existing financial asset.

46

Korea Development Bank

Notes to the Separate Financial Statements—(Continued)

For the years ended December 31, 2014 and 2013

• If the expected restructuring will result in derecognition of the existing asset, then the expected fair value of the new asset is treated as the final cash flow from the existing financial asset at the time of its derecognition. This amount is discounted from the expected date of derecognition to the reporting date using the original effective interest rate of the existing financial asset .

(ii) Impairment of available-for-sale financial assets

The Bank assesses, at each reporting date, whether objective evidence that indicate impairment of available-for-sale assets exist. If such objective evidence exists, the amount of the loss is measured as the difference between the acquisition cost and the current fair value.

An available-for-sale financial asset is considered to be impaired if there is a significant or prolonged decline in fair value of the asset below the acquisition cost. The Bank considers a 30% to be significant and a period of six months to be prolonged.

If, in a subsequent period, the fair value of a debt instrument increases and the increase can be objectively related to an event occurring after the impairment loss was recognized in, the impairment loss is reversed through the statement of comprehensive income. Moreover, the impairment loss is directly reduced from the carrying amount of the available-for-sale financial asset.

(iii) Impairment of held-to-maturity financial assets

The Bank assesses individually, at each reporting date, whether there is objective evidence that a held-to-maturity financial asset is impaired. If any such evidence exists, the amount of loss is measured as the difference between the carrying amount and the present value of estimated future cash flows, which is discounted using the initial EIR, and recognized in the statement of comprehensive income. If, in a subsequent period, the fair value of a financial asset held to maturity increases and the increase can be objectively related to an event occurring after the impairment was recognized, the impairment loss is reversed through the statement of comprehensive income. Moreover, the impairment loss is directly reduced from the carrying amount of the held-to-maturity financial asset.

(iv) Loss events of financial assets

Objective evidence that a financial asset is impaired include the following loss events:

• Significant financial difficulty of the issuer or obligor

• A breach of contract, such as a default or delinquency in interest or principal payments

• The granting of a concession to the borrower, for economic or legal reasons, that the lender would not otherwise consider

• A state of high probability that the borrower will enter bankruptcy or other financial reorganization

• The disappearance of an active market for that financial asset due to financial difficulties

• The presence of observable data indicating a measurable decrease in the estimated future cash flows of a group of financial assets since the initial recognition of the group, although the decrease cannot yet be identified with the individual financial asset within the group

47

Korea Development Bank

Notes to the Separate Financial Statements—(Continued)

For the years ended December 31, 2014 and 2013

(8) Derivative financial instruments including hedge accounting

Derivative financial instruments are initially recognized at fair value upon agreement of the contract, and re-estimated at fair value subsequently. The recognition of profit or loss due to changes in fair value of derivative instruments is as stated below.

(i) Hedge accounting

Derivative financial instruments are accounted differently depending on whether or not hedge accounting is applied, and therefore, are classified into trading purpose derivatives and hedging purpose derivatives.

Upon the transaction of hedging purpose derivatives, two different types of hedge accounting are applied; a fair value hedge, and a cash flow hedge. A fair value hedge is a hedge of the exposure to changes in fair value of a recognized asset or liability or an unrecognized firm commitment, or an identified portion of such an asset, liability or firm commitment, that is attributable to a particular risk and could affect profit or loss. A cash flow hedge is a hedge of the exposure to variability in cash flows that (i) is attributable to a particular risk associated with a recognized asset or liability (such as all or some future interest payments on variable rate debt) or a highly probable forecast transaction and (ii) could affect profit or loss. For trading purpose derivatives transaction, changes in the fair value of derivatives are recognized in net income.

At inception of the hedge relationship, the Bank formally documents the relationship between the hedged item and the hedging instrument, including the nature of the risk, the objective and strategy for undertaking the hedge, and the method that will be used to assess the effectiveness of the hedging relationship. Also, at the inception of the hedge relationship, a formal assessment is undertaken to ensure the hedging instrument is expected to be highly effective in offsetting the designated risk in the hedged item and actual result was so.

Fair value hedge

For designated and qualifying fair value hedges, the change in the fair value of a hedging derivative is recognized in profit or loss in the statement of comprehensive income. Meanwhile, the change in the fair value of the hedged item, attributable to the risk hedged, is recorded as part of the carrying value of the hedged item and is also recognized in profit or loss in the statement of comprehensive income. When the hedge no longer meets the criteria for hedge accounting, the hedge relationship is terminated. For hedged item recorded at amortized cost, the difference between the carrying value of the hedged item on termination and the face value is amortized over the remaining term of the original hedge using the EIR.

Cash flow hedge

For designated and qualifying cash flow hedges, the effective portion of gain or loss on the hedging instruments is initially recognized directly in equity. The ineffective portion of the gain or loss on the hedging instrument is recognized immediately in the statement of comprehensive income. When the hedged cash flow affects the profit or loss in statement of comprehensive income, the gain or loss on the hedging instrument is recorded in the corresponding income or expense line in profit or loss in the statement of comprehensive income. When a hedge no longer meets the criteria for hedge accounting, any cumulative gain or loss existing in equity at that time remains in equity and is recognized when the hedged forecasted transaction is ultimately recognized in the statement of comprehensive income. When a forecasted transaction is no longer expected to occur, the cumulative gain and loss that was reported in equity is immediately transferred to profit or loss in the statement of comprehensive income.

48

Korea Development Bank

Notes to the Separate Financial Statements—(Continued)

For the years ended December 31, 2014 and 2013

(ii) Embedded derivative instruments

Derivatives embedded in other financial instruments or other host contracts are treated as separate derivatives. The Bank records embedded derivative instruments at fair value if their economic characteristics and risks are not clearly and closely related to those of the host contract. If the embedded derivative cannot be measured separately from the host contract, the Bank aggregately designates the host contract and embedded derivative as a financial instrument at fair value through profit or loss. Changes due to the fair value assessment of embedded derivative instruments are recognized in profit or loss.

(iii) Other derivative financial instruments

Changes in the fair value of other derivative financial instrument, not designated as a hedging instrument, are recognized immediately in profit or loss.

(9) Fair value of financial instruments

The fair value of financial instruments that are traded in active markets is determined by referencing quoted market prices at each reporting date. For financial instruments not traded in an active market, the fair value is determined using appropriate valuation techniques. Such techniques may include discounted cash flow analysis or other valuation methods.

The Bank’s policies for measuring fair value of financial instruments at amortized costs are as follows:

• Cash and due from banks: Fair value of cash is considered equivalent to the carrying amount. In the case of due from banks on demand, which do not have a set maturity and can be realized instantly, the carrying amount is considered to be a close estimate of the fair value and is assumed so. In the case of other ordinary due from banks, the cash flow discount method is used to estimate the fair value.

• Loans: The fair value of loans is the expected future cash flows, reflecting premature redemption ratio, discounted by the market interest rate, adjusted by a spread sheet considering the probability of default. Exceptions to this method include loans with credit line facilities, loans with a maturity of three months or less left and impaired loans, which the Bank assumes the carrying amount as the fair value.

• Held-to-maturity financial assets: The fair value of held-to-maturity financial assets is computed by widely-accepted appraisal agencies upon request.

• Deposits: The fair value of deposits is computed using the discounted cash flow method. However for deposits, whose cash flows cannot be estimated reasonably, the Bank assumes the carrying amount as the fair value.

• Borrowings: For borrowings in Korean won, the fair value is computed using the discounted cash flow method. For borrowings in foreign currency, the fair value is computed by widely-accepted appraisal agencies upon request.

• Bonds: The fair value of industrial financial debentures in Korean won, except structured debentures in Korean won, is computed using the discounted cash flow method. For structured industrial financial debentures in Korean won and industrial financial debentures in foreign currency, the fair value is computed by widely-accepted appraisal agencies upon request.

• Other financial assets and liabilities: The fair value of other financial assets and liabilities is computed using the discounted cash flow method. However, in cases cash flow cannot be estimated reasonably, the Bank assumes the carrying amount as the fair value.

49

Korea Development Bank

Notes to the Separate Financial Statements—(Continued)

For the years ended December 31, 2014 and 2013

(10) Day one profit or loss recognition

For financial instruments classified as level 3 on the fair value level hierarchy measured using assess variables not observable in the market, the difference between the fair value at initial recognition and the transaction price, which is equivalent to Day one profit or loss, is amortized by using the straight line method over time.

(11) Property and equipment

The Bank’s property and equipment are recognized at the carrying amount at historical costs less accumulated depreciation and accumulated impairment in value. Historical costs include the expenditures directly related to the acquisition of assets.

Subsequent costs are recognized in the carrying amount of assets or, if appropriate, as separate assets if the probabilities future economic benefits associated with the assets will flow into the Bank and the costs can be measured reliably; the carrying amount of the replaced part is derecognized. Furthermore, any other repairs or maintenances are charged to profit or loss as incurred.

Land is not depreciated. Depreciation on other assets is calculated using the straight line method to the amount of residual value less acquisition cost over the following estimated useful lives:

Type	Useful lives (years)
Buildings		20 ~ 50
Structure		10 ~ 40
Leasehold improvements		4
Movable property		4

Property and equipment are impaired when the carrying amount exceeds the recoverable amount. The Bank assesses residual value and economic life of its assets at each reporting date and makes adjustments to useful lives when necessary. Any gain or loss arising from the disposal of the asset (calculated as the difference between the net disposal proceeds and the carrying amount of the asset) is recognized in non-operating income (expense) in the statement of comprehensive income.

(12) Investment property

The Bank classifies property held for the purpose of rental income or benefits from capital appreciation as investment property. Investment property is measured initially at cost, including transaction costs. Subsequent to initial recognition, the cost model is applied. Subsequent to initial recognition, an item of investment property is carried at its cost less any accumulated depreciation and any accumulated impairment loss.

Investment properties are derecognized either when they have been disposed of or when the investment property is permanently withdrawn from use and no future economic benefit is expected from its disposal. The difference between the net disposal proceeds and the carrying amount of the asset is recognized in the statement of comprehensive income in the period of de-recognition. Reclassification to other account is made if there is a change in use of corresponding investment property.

50

Korea Development Bank

Notes to the Separate Financial Statements—(Continued)

For the years ended December 31, 2014 and 2013

Depreciation of investment property is calculated using the straight line method over its estimated useful lives as follows:

Type	Useful lives (years)
Buildings		20 ~ 50
Structure		10 ~ 40

(13) Intangible assets

An intangible asset is recognized only when its cost can be measured reliably, and the probabilities future economic benefits from the asset will flow into the Bank are high. Separately acquired intangible assets are recognized at the acquisition cost, and subsequently, the cost less accumulated depreciation and accumulated impairment is recognized as the carrying amount.

Intangible assets with finite lives are amortized over the four-year to 30-year period of useful economic lives using the straight line method. At the end of each reporting period, the Bank reviews intangible assets for any evidence that indicate impairment, and upon the presence of such evidence, the Bank estimates the amount recoverable and recognizes the loss accordingly.

Intangible assets with indefinite useful lives are not amortized, but are tested for impairment annually. Furthermore, the Bank reviews such intangible assets to determine whether or not it is appropriate to consider these assets to have indefinite useful lives. If in the case the Bank concludes an asset is not qualified to be classified as non-finite, prospective measures are taken to consider such an asset as finite.

(14) Impairment of non-financial assets

The Bank tests for any evidence of impairment in assets and reviews whether or not the impairment has taken place by estimating the recoverable amount, at the end of each reporting period. The recoverable amount is the higher of the fair value less cost and value in use of an asset.

Except for impairment losses in respect of goodwill which are never reversed, an impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount. The reversal is limited so that the carrying amount of the asset does not exceed its recoverable amount, nor exceeds the carrying amount that would have been determined, net of depreciation, had no impairment loss been recognized for the asset in prior years.

(15) Non-derivative financial liabilities

The Bank classifies non-derivative financial liabilities into financial liabilities at fair value through profit or loss or other financial liabilities, in accordance with the substance of the contractual arrangement and the definitions of financial liability. The Bank recognizes these financial liabilities in the statement of financial position when the Bank becomes a party to the contractual provisions of the financial liability.

(i) Financial liabilities at fair value through profit or loss

Financial liabilities at fair value through profit or loss in the current year include financial liabilities held for trading and financial liabilities designated at FVTPL upon initial recognition. Financial liabilities and derivatives

51

Korea Development Bank

Notes to the Separate Financial Statements—(Continued)

For the years ended December 31, 2014 and 2013

are classified as financial instruments held for trading if they are acquired for the purpose of repurchasing in the near future. Financial liabilities are classified as financial liabilities at FVTPL upon initial recognition, if the profit or loss from the liabilities indicates to be more purpose-appropriate to be recognized as profit or loss. Financial liabilities at FVTPL are designated at fair value in subsequent measurements, and any related un-realized profit or loss is recognized as profit or loss.

(ii) Financial liabilities measured at amortized cost

Financial liabilities measured at amortized cost are recognized at fair value less cost less transaction cost upon initial recognition, and subsequently at amortized costs. The difference between the proceeds (net of transaction cost) and the redemption value is recognized in the statement of comprehensive income over the periods of the liabilities using the EIR.

Fees paid on the establishment of a loan facility are recognized as transaction costs of the loan, if the probability that some or all of the facility will be drawn down is high. If, however, there is not enough evidence to conclude a draw-down of some or all of the facility will occur, the fee is capitalized as a prepayment for liquidity services and amortized over the period of the facility to which it relates.

(iii) De-recognition of financial liabilities

A financial liability is de-recognized when the obligation under the liability is discharged, cancelled or expired. When an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as a de-recognition of the original liability and the recognition of a new liability. The difference between the carrying value of the original financial liability and the consideration paid is recognized in profit or loss.

(16) Employee benefits

(i) Short-term employee benefits

Short-term employee benefits are employee benefits that are due to be settled wholly before 12 months after the end of the period in which the employees render the related service. When an employee has rendered service to the Bank during an accounting period, the Bank recognizes the undiscounted amount of short-term employee benefits expected to be paid in exchange for that service.

(ii) Retirement benefits: defined contribution plans

A defined contribution plan is a pension plan under which the Bank pays fixed contributions into a separate fund. A defined benefit plan defines the amount of pension benefit that an employee will receive on retirement and is usually dependent on one or more factors such as years of service and compensation.

The Bank is no longer responsible for any foreseeable future liability after a certain amount or percentage of money is set aside for defined contribution plans. If the pension plan allows for early retirement, payments are recognized as employee benefits. If the contribution already paid exceeds the contribution due for service before the end of the reporting period, the Bank recognizes that excess as an asset to the extent that the prepayment will lead to a reduction in future payments or a cash refund.

52

Korea Development Bank

Notes to the Separate Financial Statements—(Continued)

For the years ended December 31, 2014 and 2013

(iii) Retirement benefits: defined benefit plans

The Bank’s net obligation in respect of defined benefit plans is calculated by estimating the amount of future benefit that employees have earned in the current and prior periods, discounting that amount and deducting the fair value of any plan assets. The calculation of defined benefit obligations is performed annually by a qualified actuary using the projected unit credit method. The present value of the defined benefit obligation is determined by discounting the estimated future cash outflows using interest rates of high-quality corporate bonds that are denominated in the currency in which the benefits will be paid, and have terms to maturity similar to the terms of the related pension liability.

Remeasurements of the net defined benefit liabilities (assets), which comprise actuarial gains and losses, the return on plan assets (excluding interest) and the effect of the asset ceiling (if any, excluding interest), are recognised immediately in other comprehensive income.

(17) Provisions

Provisions are recognized when the Bank has a present legal or constructive obligation as a result of a past event, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation.

(18) Financial guarantees

Financial guarantee contracts are contracts that require the issuer (the Bank) to make specified payments to reimburse the holder for a loss it incurs because a specified debtor fails to make payments when due, in accordance with the original or changed terms of a debt instrument. Financial guarantees are initially recognized in the financial statements at fair value on the date the guarantee was given, and amortized over the period of the guarantee. Subsequent to initial recognition, the Bank’s liabilities under such guarantees are measured at the higher of:

• The amount determined in accordance with K-IFRS No. 1037 Provisions, Contingent Liabilities and Contingent Assets and

• The initial amount less amortization of fees recognized in accordance with K-IFRS No. 1018 Revenue

(19) Securities under resale or repurchase agreements

Securities purchased under agreements to resell are recorded as other loans and receivables and the related interest from these securities is recorded as interest income; securities sold under agreements to repurchase are recorded as other borrowings, and the related interest from these securities is recorded as interest expense.

(20) Interest income and expense

Interest income and expense are recognized in profit or loss using the effective interest method. The effective interest method measures the amortized costs of financial instruments and allocates the interest income or expense during the related period.

Upon the calculation of the effective interest rate, the Bank estimates future cash flows by taking into consideration all contractual terms of the financial instrument, but not future credit loss. The calculation also reflects any fees or points paid or received, transaction costs and any related premiums or discounts. In the case

53

Korea Development Bank

Notes to the Separate Financial Statements—(Continued)

For the years ended December 31, 2014 and 2013

that the cash flow and expected duration of a financial instrument cannot be estimated reliably, the effective interest rate is calculated by the contractual cash flow during the contract period.

Once an impairment loss has been recognized on a financial asset or a group of similar assets, subsequent interest income is recognized on the interest rate that was used to discount future cash flow for the purpose of measuring the impairment loss.

(21) Fees and commission income

Fees and commission income and expense are classified as follows according to related regulations:

(i) Fees and commission from financial instruments

Fees and commission income and expense that are integral to the effective interest rate on a financial asset or liability are included in the measurement of the effective interest rate. It includes those related to evaluation of the borrowers’ financial status, guarantee, collateral, other agreements and related evaluation as well as business transaction, rewards for activities, such as document preparation and recording and setup fees incurred during issuance of financial liabilities. However, when financial instruments are classified as financial instruments at fair value through profit or loss, fees and commission are recognized as revenue upon initial recognition.

(ii) Fees and commission from services

Fees and commission income charged in exchange for services to be performed during a certain period of time such as asset management fees, consignment fees and assurance service fees are recognized as the related services are performed. When a loan commitment is not expected to result in the draw-down of a loan and K-IFRS No. 1039 Financial Instrument: Recognition and Measurement is not applied for the commitment, the related loan commitment fees are recognized as revenue proportionally to time over the commitment period.

(iii) Fees and commission from significant transaction

Fees and commission from significant transactions, such as trading stocks and other securities, negotiation and mediation activities for third parties, for instance business transfer and takeover, are recognized when transactions are completed.

(22) Dividend income

Dividend income is recognized upon the establishment of the Bank’s right to receive the payment.

(23) Income tax expense

Income tax expense comprises current and deferred income tax. Current income tax and deferred income tax are recognized in profit or loss except to the extent that the tax arises from a transaction or event, which is recognized in other comprehensive income or directly in equity, or a business combination.

The Bank recognizes deferred income tax liabilities for all taxable temporary differences associated with investments in subsidiaries, associates, except to the extent that the Bank is able to control the timing of the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the

54

Korea Development Bank

Notes to the Separate Financial Statements—(Continued)

For the years ended December 31, 2014 and 2013

foreseeable future. The Bank recognizes deferred income tax assets for all deductible temporary differences arising from investments in associates, to the extent that it is probable that the temporary difference will reverse in the foreseeable future and taxable profit will be available against which the temporary difference can be utilized.

Deferred income tax assets and liabilities are measured at the tax rates that are expected to apply to the reporting period when the assets are realized or the liabilities settled, based on tax rates (and tax laws) that have been enacted or substantively enacted by the end of the reporting period.

The measurement of deferred income tax assets and liabilities reflects the income tax effects that would follow from the manner in which the Bank expects, at the end of the reporting period, to recover or settle the carrying amount of its assets and liabilities.

The carrying amount of a deferred income tax asset is reviewed at the end of each reporting period and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow the benefit of part or all of that deferred income tax asset to be utilized.

Deferred income tax assets and liabilities are off-set only if the Bank has a legally enforceable right to off-set the related current income tax assets and liabilities, and the assets and liabilities relate to income tax levied by the same tax authority and are intended to be settled on a net basis.

Additional income taxes arising from dividend payments are recognized when expenses related to dividend payments are recognized.

(24) Accounting for trust accounts

The Bank, for the purpose of financial reporting, differentiates trust assets from identifiable assets according to the Financial Investment Services and Capital Markets Act. Furthermore, the Bank receives trust fees from the application, management and disposal of trust assets, and appropriates such amounts for fees from trust accounts.

Meanwhile, in the case the fee from an unspecified principal and interests guaranteed money in trust does not meet the principal or interest amount, even after appropriating deficit with trust fees and special reserve, the Bank fills in the remaining deficit in the trust account and appropriates such amounts for losses on trust accounts.

(25) Regulatory reserve for loan loss

In the case that the total sum of allowance for possible loan loss does not meet the amount prescribed in Article 29(1) of the Regulations on Supervision of Banking Business, the Bank, according to K-IFRS, records the difference at the end of each reporting period, and records the equal amount as a reserve for loan loss.

In the case that the existing total sum of reserve for possible loan loss exceeds the amount needed to be set aside as of the closing date, the surplus is to be reversed. Furthermore, in the case that undisposed deficit exists, reserves for loan loss is saved from the time the undisposed deficit is disposed.

(26) Earnings per share

The Bank represents its diluted and basic earnings per common share in the separate comprehensive statement of income. Basic earnings per share (“EPS”) is calculated by dividing net profit attributable to

55

Korea Development Bank

Notes to the Separate Financial Statements—(Continued)

For the years ended December 31, 2014 and 2013

shareholders of the Bank by the weighted average number of common shares outstanding during the reporting period. Diluted earnings per share is calculated by adjusting net profit attributable to common shareholders of the Bank, considering dilution effects from all potential common shares, and the weighted average number of common shares outstanding.

(27) Changes in accounting policies and the impact of changes

(i) Changes in accounting policies

Except for the following new standards and amendments to existing standards, the Bank applies its accounting policies consistently to which were used for preparing its separate financial statements for all periods presented.

The Bank has applied the following amendments to standards and interpretation, with a date of initial application of January 1, 2014.

• Offsetting Financial Assets and Financial Liabilities (Amendments to K-IFRS 1032 ‘Financial Instruments: Presentation’)

• Recoverable Amount Disclosures for Non-Financial Assets (Amendments to K-IFRS 1036)

• K-IFRS 2121 ‘Levies’

Followings are characteristics of the accounting policy changes.

Offsetting Financial Assets and Financial Liabilities

The Bank has adopted amendments to K-IFRS 1032, ‘Offsetting Financial Assets and Financial Liabilities’ since January 1, 2014. The amendments clarify the meaning of ‘currently has a legally enforceable right of set-off’. According to the amendments, the right to set off should not be contingent on a future event, and legally enforceable in the normal course of business, in the event of default, and in the event of insolvency or bankruptcy of the entity and all of the counterparties. The amendments also state that some gross settlement systems would be considered equivalent to net settlement if they eliminate or result in insignificant credit and liquidity risk and process receivables and payables in a single settlement process or cycle.

In accordance with the transitional requirements of amendments to K-IFRS 1032, the Bank applied the amendments retrospectively. The adoption of the amendments had no impact on the prior year’s financial statements.

Recoverable Amount Disclosures for Non-Financial Assets

The Bank has adopted amendments to K-IFRS 1036 ‘Impairment of Assets’ since January 1, 2014. The amendments require the disclosure of information about the recoverable amount of impaired assets, if that amount is based on fair value less costs of disposal. They also require the disclosure of additional information about that fair value measurement. In addition, if the recoverable amount of impaired assets based on fair value less costs of disposal was measured using a present value technique, the amendments also require the disclosure of the discount rates that have been used in the current and previous measurements.

The adoption of the amendments had no impact on the prior year’s financial statements.

K-IFRS 2121 ‘Levies’

The Bank has adopted K-IFRS 2121, ‘Levies’ since January 1, 2014. K-IFRS 2121 is an Interpretation of K-IFRS 1037 ‘Provisions, Contingent Liabilities and Contingent Assets’, on the accounting for levies imposed

56

Korea Development Bank

Notes to the Separate Financial Statements—(Continued)

For the years ended December 31, 2014 and 2013

(In millions of won)

by governments. K-IFRS 1037 sets out criteria for the recognition of a liability, one of which is the requirement for the entity to have a present obligation as a result of a past event (or ‘obligating event’). K-IFRS 2121 clarifies that the obligating event that gives rise to a liability to pay a levy is the activity described in the relevant legislation that triggers the payment of the levy.

The interpretation does not provide guidance on the accounting for the costs arising from recognizing the liability to pay a levy. Other K-IFRSs should be applied to determine whether the recognition of a liability to pay a levy gives rise to an asset or an expense.

The Bank retrospectively applied the interpretation in accordance with the transitional requirements. The adoption of the amendments had no significant impact on the Bank’s financial statements.

(28) New standards and interpretations not yet adopted

The following new standards, interpretations and amendments to existing standards have been published and are mandatory for the Bank for annual periods beginning after January 1, 2014, and the Bank has not early adopted them. Management believes the impact of the amendments on the Bank’s separate financial statements is not significant.

K-IFRS 1019 ‘Employee Benefits’—Employee contributions

Amendments to K-IFRS 1019 introduced a practical expedient to accounting for defined benefit plan, when employees or third parties pay contributions if certain criteria are met. According to the amendments, the entity is permitted to recognize those contributions as a reduction of the service cost in the period in which the related service is rendered, instead of forecast future contributions from employees or third parties and attribute them to periods or service as negative benefits. This amendment is effective for annual periods beginning on or after July 1, 2014.

K-IFRS 1027 ‘Separate Financial Statements’

Amendments to K-IFRS 1027 introduced equity accounting as a third option in the entity’s separate financial statements, in addition to the existing cost and fair value options. This amendment is effective for annual periods beginning on or after January 1, 2016, with early adoption permitted. Management is in the process of evaluating the impact of the amendments on the Bank’s financial statements.

4. Cash and Due from Banks

(1) Cash and due from banks as of December 31, 2014 and 2013 are as follows:

	December 31, 2014			December 31, 2013
Cash	W	93,801			153,965
Due from banks in Korean won:
Due from Bank of Korea		1,127,162			1,973,652
Other due from banks in Korean won		104,687			462
		1,231,849			1,974,114
Due from banks in foreign currencies/off-shores		4,648,998			3,582,359
Provisions		(105	)		(101	)
	W	5,974,543			5,710,337

57

Korea Development Bank

Notes to the Separate Financial Statements—(Continued)

For the years ended December 31, 2014 and 2013

(In millions of won)

(2) Restricted due from banks as of December 31, 2014 and 2013 are as follows:

	December 31, 2014		December 31, 2013
Reserve deposit	W	813,498		1,779,520
Others		97,086		94,012
	W	910,584		1,873,532

5. Financial Assets Held for Trading

(1) Financial assets held for trading as of December 31, 2014 and 2013 are as follows:

	December 31, 2014		December 31, 2013
Financial assets held for trading denominated in Korean won:
Equity securities
Stocks and equity investments	W	15,122		21,432
Debt securities
Government and public bonds		986,037		1,063,318
Financial bonds		347,293		320,009
Corporate bonds		20,017		—
		1,353,347		1,383,327
		1,368,469		1,404,759
Financial assets held for trading denominated in foreign currencies/off-shores:
Debt securities		39,724		20,894
		39,724		20,894
Loaned financial assets held for trading:
Debt securities		10,205		—
	W	1,418,398		1,425,653

(2) Details of debt securities in financial assets held for trading as of December 31, 2014 and 2013 are as follows:

	December 31, 2014
	Face value		Acquisition cost		Fair value (Carrying amounts)
Government and public bonds in Korean won	W	975,000		983,679		986,037
Financial bonds in Korean won		350,000		347,345		347,293
Corporate bonds in Korean won		20,000		20,018		20,017
Debt securities in foreign currencies /off-shores		39,681		38,752		39,724
Loaned debt securities		10,000		10,110		10,205
	W	1,394,681		1,399,904		1,403,276

58

Korea Development Bank

Notes to the Separate Financial Statements—(Continued)

For the years ended December 31, 2014 and 2013

(In millions of won)

	December 31, 2013
	Face value		Acquisition cost		Fair value (Carrying amounts)
Government and public bonds in Korean won	W	1,058,000		1,075,699		1,063,318
Financial bonds in Korean won		320,000		320,772		320,009
Debt securities in foreign currencies /off-shores		21,106		21,173		20,894
	W	1,399,106		1,417,644		1,404,221

Debt securities in Korean won are measured at the lower of the fair values provided by KIS Bonds Pricing Inc and FN Pricing Inc. Debt securities in foreign currencies are measured at the lower of the fair values provided by KIS Bonds Pricing Inc and NICE Pricing & Information Inc.

6. Available-for-Sale Financial Assets

(1) Available-for-sale financial assets as of December 31, 2014 and 2013 are as follows:

	December 31, 2014		December 31, 2013
Available-for-sale financial assets denominated in Korean won:
Equity securities:
Stocks and equity investments	W	8,945,741		2,254,628
Beneficiary certificates		4,246,301		3,967,455
Others		33,356		—
		13,225,398		6,222,083
Debt securities:
Government and public bonds		451,039		732,834
Financial bonds		6,964,023		2,030,408
Corporate bonds		13,653,028		12,594,249
		21,068,090		15,357,491
		34,293,488		21,579,574
Available-for-sale financial assets denominated in foreign currencies/off-shores:
Equity securities		455,793		386,817
Debt securities		3,410,744		3,508,314
		3,866,537		3,895,131
Loaned available-for-sale financial assets:
Debt securities		—		59,528
	W	38,160,025		25,534,233

Equity securities with no quoted market prices in active markets and for which the fair value cannot be measured reliably are recorded at cost in the amount of W5,046,707 million as of December 31, 2014 (W200,287 million as of December 31, 2013).

59

Korea Development Bank

Notes to the Separate Financial Statements—(Continued)

For the years ended December 31, 2014 and 2013

(In millions of won)

(2) Changes in available-for-sale financial assets for the years ended December 31, 2014 and 2013 are as follows:

	2014			2013
Beginning balance	W	25,534,233			24,886,010
Acquisition		23,942,377			29,488,413
Disposal		(25,724,134	)		(28,094,389	)
Change due to amortization		(1,054	)		20,804
Unrealized change in fair value recorded in equity		64,363			(259,860	)
Impairment loss		(355,532	)		(637,701	)
Reversal of impairment loss		21,367			22,138
Reclassification		(14,994	)		(3,033	)
Foreign exchange differences		86,180			(67,745	)
Others(*)		108,652			179,596
Acquisition of parent company		14,498,567			—
Ending balance	W	38,160,025			25,534,233

(*) Represents the value increase in available-for-sale equity securities acquired from Hyundai Cement Co., Ltd., Osung LST Co., Ltd., SSangyong Engineering & Construction, and Keangnam Enterprises Ltd. during the year ended December 31, 2014 after debt-for-equity swap decision of The Creditor Financial Institutions Committee, based upon Corporate Restructuring Promotion Act.

(3) Equity securities with disposal restrictions in available-for-sale financial assets as of December 31, 2014 and 2013 are as follows:

Company	December 31, 2014
	Number of shares		Carrying amount		Restricted period
KUMHO Tire Co., Inc.(*)		21,339,320	W	206,351	Undecided
Oriental Precison & Engineering Co., Ltd.		62,700,511		41,257	Until December 31, 2016
KUMHO Industrial Co., Ltd.		1,517,608		34,450	Until December 31, 2016
Osung LST Co., Ltd.		17,290,267		21,008	Until December 31, 2017
Hyundai Cement Co., Ltd		1,433,800		15,127	Until December 31, 2016
Keangnam Enterprises LTD.		2,916,400		14,028	Until December 31, 2016
KUKJE, Machinery Co., Ltd.		3,492,000		10,357	Until December 31, 2016
Taihan Electric wire Co., Ltd.		9,982,200		10,231	Until December 31, 2015
Ajin P and P Co., Ltd.		516,270		5,721	Undecided
Jaeyoung Solutec Co., Ltd.		1,962,000		2,786	Until December 31, 2016
Cosmetech Co., Ltd.		11,768,000		2,648	Until December 31, 2016
Samho International Co., Ltd		183,000		2,406	Until December 31, 2016
Hanchang Paper Co., Ltd(*)		3,204,600		2,134	Until December 31, 2016
KPM Tech Co., Ltd.		57,714		111	Until December 31, 2015
Force Tec Co., Ltd.		1,428,571		1	Until December 31, 2017
Young Gwang Stainless Co., Ltd		413,000		—	Until December 31, 2016
		140,205,261	W	368,616

(*) Disposal of some shares of equity securities acquired through debt-for-equity swap during the year ended December 31, 2014.

60

Korea Development Bank

Notes to the Separate Financial Statements—(Continued)

For the years ended December 31, 2014 and 2013

(In millions of won)

Company	December 31, 2013
	Number of shares		Carrying amount		Restricted period
KUMHO Tire Co., Inc.		27,357,555	W	314,612	Until December 31, 2014
Oriental Precison & Engineering Co., Ltd.		60,511,999		78,666	Until December 31, 2016
Ssangyong Cement Industry Co., Ltd.		11,090,842		75,972	Undecided
KUMHO Industrial Co., Ltd.		1,272,921		14,957	Until December 31, 2014
Taesan LCD Co., Ltd.		1,405,514		3,718	Until December 31, 2013
Hanchang Paper Co., Ltd.		6,409,200		3,878	Until December 31, 2014
Jaeyoung Solutec Co., Ltd.		1,962,000		2,659	Until December 31, 2013
Byucksan Engineering & Construction Co., Ltd.		188,830		632	Until June 30, 2014
Hanil Engineering & Construction Co., Ltd.		183,803		—	Until December 31, 2014
Ssangyong Engineering & Construction Co., Ltd.		4,347,327		—	Until July 31, 2014
Taihan Electric wire Co., Ltd.		4,991,100		24,698	Until December 20, 2014
		119,721,091	W	519,792

(4) Details of debt securities in available-for-sale financial assets as of December 31, 2014 and 2013 are as follows:

	December 31, 2014
	Face value		Acquisition cost		Fair value (Carrying amounts)
Government and public bonds in Korean won	W	440,644		448,753		451,039
Financial bonds in Korean won		6,976,274		6,870,795		6,964,023
Corporate bonds in Korean won		13,817,691		13,815,262		13,653,028
Debt securities denominated in foreign currencies /off shores		3,370,336		4,122,625		3,410,744
	W	24,604,945		25,257,435		24,478,834

	December 31, 2013
	Face value		Acquisition cost		Fair value (Carrying amounts)
Government and public bonds in Korean won	W	747,644		757,703		732,834
Financial bonds in Korean won		2,030,000		2,032,254		2,030,408
Corporate bonds in Korean won		12,729,304		12,722,855		12,594,249
Debt securities denominated in foreign currencies/off shores		3,452,166		3,557,521		3,508,314
Loaned debt securities		60,000		60,410		59,528
	W	19,019,114		19,130,743		18,925,333

Debt securities in Korean won are measured at the lower of fair values provided by KIS Bonds Pricing Inc and FN Pricing Inc. Debt securities in foreign currencies are measured at the lower of the fair values provided by KIS Bonds Pricing Inc and NICE Pricing & Information Inc.

61

Korea Development Bank

Notes to the Separate Financial Statements—(Continued)

For the years ended December 31, 2014 and 2013

(In millions of won)

7. Held-to-Maturity Financial Assets

(1) Held-to-maturity financial assets as of December 31, 2014 and 2013 are as follows:

	December 31, 2014				December 31, 2013
	Amortized cost		Fair value		Amortized cost		Fair value
Held-to-maturity financial assets in Korean won:
Government and public bonds	W	5,899		6,850		7,109		7,703
Corporate bonds		—		—		20,000		20,200
Held-to-maturity financial assets in foreign currencies:
Corporate bonds		11,339		11,339		—		—
	W	17,238		18,189		27,109		27,903

(2) Changes in held-to-maturity financial assets for the years ended December 31, 2014 and 2013 are as follows:

	2014			2013
Beginning balance	W	27,109			88,690
Acquisition		11,465			379
Redemption		(21,146	)		(62,375	)
Change due to amortization		(166	)		415
Foreign exchange differences		(24	)		—
Ending balance	W	17,238			27,109

62

Korea Development Bank

Notes to the Separate Financial Statements—(Continued)

For the years ended December 31, 2014 and 2013

(In millions of won)

8. Loans and Allowance for Loan Losses

(1) Loans and allowance for loan losses as of December 31, 2014 and 2013 are as follows:

	December 31, 2014					December 31, 2013
	Amortized cost			Fair value		Amortized cost			Fair value
Loans in Korean won:
Loans for working capital	W	42,086,815			41,135,493		27,862,944			27,073,271
Loans for facility development		51,574,448			51,779,986		33,839,619			33,888,705
Loans for households		3,181,148			3,232,064		1,898,211			1,908,753
Inter-bank loans		1,149,146			1,064,195		870,808			797,131
		97,991,557			97,211,738		64,471,582			63,667,860
Loans in foreign currencies:
Loans		15,319,099			15,820,744		11,944,025			12,296,262
Inter-bank loans		588,028			588,069		650,349			650,407
Loans borrowed from overseas financial institutions		218,227			224,242		288,502			293,119
Off-shore loans receivables		8,622,662			8,997,653		7,570,030			7,827,279
		24,748,016			25,630,708		20,452,906			21,067,067
Other loans receivables:
Bills bought in foreign currency		1,599,989			1,582,147		1,225,933			1,224,039
Advance payments on acceptances and guarantees		258,087			120,817		144,304			116,486
Privately-placed corporate bonds		3,053,225			2,870,586		3,847,056			3,651,106
Others		9,109,227			9,110,370		7,978,031			7,890,162
		14,020,528			13,683,920		13,195,324			12,881,793
		136,760,101			136,526,366		98,119,812			97,616,720
Less:
Allowance for loan losses		(2,398,658	)				(1,773,150	)
Present value discount		(55,418	)				(43,577	)
Deferred loan origination costs and fees		8,441					5,328
	W	134,314,466					96,308,413

63

Korea Development Bank

Notes to the Separate Financial Statements—(Continued)

For the years ended December 31, 2014 and 2013

(In millions of won)

(2) Changes in allowance for loan losses for the years ended December 31, 2014 and 2013 are as follows:

	2014
	Loans in Korean won											Other loans
	Loans for working capital			Loans for facility development			Others		Loans in foreign currencies			Private placed corporate bonds			Others			Total
Beginning balance	W	941,216			229,177			8,126		121,876			323,362			149,393			1,773,150
Provision for loan losses		1,067,839			328,070			2,926		(75,232	)		222,972			110,184			1,656,759
Write-offs		(167,618	)		(76,061	)		—		—			(101,410	)		(12,409	)		(357,498	)
Recovery		—			4,715			—		83,179			—			—			87,894
Sale		(48,742	)		(16,819	)		—		(1,576	)		(32,121	)		(203	)		(99,461	)
Debt-for-equity swap		(700,661	)		7,271			—		—			(192,452	)		—			(885,842	)
Foreign exchange differences		—			—			—		8,460			—			—			8,460
Acquisition of parent company		89,129			102,787			—		32,302			11,831			1,268			237,317
Others		(10,850	)		(29,657	)		—		(4,388	)		28,523			(5,749	)		(22,121	)
Ending balance	W	1,170,313			549,483			11,052		164,621			260,705			242,484			2,398,658

	2013
	Loans in Korean won											Other loans
	Loans for working capital			Loans for facility development			Others		Loans in foreign currencies			Private placed corporate bonds			Others			Total
Beginning balance	W	334,652			183,359			2,720		120,995			88,108			52,707			782,541
Provision for loan losses		926,149			118,371			5,406		14,809			426,688			120,079			1,611,502
Write-offs		(94,086	)		(40,391	)		—		(22,404	)		(173,149	)		(6,500	)		(336,530	)
Recovery		—			26,164			—		10,266			—			—			36,430
Sale		(22,859	)		(43,607	)		—		(701	)		(2,369	)		(8,291	)		(77,827	)
Debt-for-equity swap		(181,469	)		(10,969	)		—		—			(10,147	)		—			(202,585	)
Foreign exchange differences		—			—			—		(496	)		—			—			(496	)
Others		(21,171	)		(3,750	)		—		(593	)		(5,769	)		(8,602	)		(39,885	)
Ending balance	W	941,216			229,177			8,126		121,876			323,362			149,393			1,773,150

(3) Losses related to loans for the years ended December 31, 2014 and 2013 are as follows:

	2014			2013
Provision for loan losses	W	(1,656,759	)		(1,611,502	)
Losses on disposal of loan		(10,295	)		(148,286	)
	W	(1,667,054	)		(1,759,788	)

64

Korea Development Bank

Notes to the Separate Financial Statements—(Continued)

For the years ended December 31, 2014 and 2013

(In millions of won)

(4) Changes in net deferred loan origination cost and fees for the years ended December 31, 2014 and 2013 are as follows:

	2014			2013
Beginning balance	W	5,328			(9,235	)
New deferrals		38,984			15,296
Amortization		(15,674	)		(733	)
Acquisition of parent company		(20,197	)		—
Ending balance	W	8,441			5,328

9. Derivative Financial Instruments

The Bank’s derivative financial instruments consist of trading derivatives and hedging derivatives, depending on the nature of each transaction. The Group enters into hedging derivative transactions mainly for the purpose of hedging risk related to changes in fair values of the underlying assets and liabilities and future cash flows.

The Bank enters into trading derivative transactions such as futures, forwards, swaps and options for arbitrage transactions by speculating on the future value of the underlying asset. Derivatives held-for trading transactions include contracts with the Bank’s clients and its liquidation position.

For the purpose of hedging the exposure to the variability of fair values and cash flows of funds in Korean won by changes in interest rate, the Bank mainly uses interest swaps or currency swaps. The main counterparties are foreign financial institutions and local banks. In addition, to hedge the exposure to the variability of fair values of bonds in foreign currencies by changing in interest rate or foreign exchange rate, the Bank mainly uses interest swaps or currency swaps.

The notional amounts outstanding for derivative contracts and the carrying amounts of the derivative financial instruments as of December 31, 2014 and 2013 are as follows:

	December 31, 2014
	Notional amounts				Carrying amounts
	Buy		Sell		Asset			Liability
Trading purpose derivative financial instruments:
Interest rate	W	298,123,883		300,231,635		2,294,826			2,140,241
Currency		49,230,373		46,584,072		1,687,671			1,705,896
Stock		42,037		118,193		2,008			322
Commodities		282,950		282,950		39,185			39,372
Embedded derivatives		405,633		—		37,966			—
Allowance and other adjustments		—		—		(11,471	)		(1,747	)
		348,084,876		347,216,850		4,050,185			3,884,084
Hedging purpose derivative financial instruments:
Interest rate(*)		22,069,120		22,069,120		840,842			57,089
Currency		7,198,098		8,071,890		24,007			848,050
Allowance and other adjustments		—		—		(2,242	)		(69	)
		29,267,218		30,141,010		862,607			905,070
	W	377,352,094		377,357,860		4,912,792			4,789,154

(*) The maximum period for which the cash flow hedge accounting applied derivative contracts are exposed to risk of cash flow fluctuation is expected until May 12, 2019.

65

Korea Development Bank

Notes to the Separate Financial Statements—(Continued)

For the years ended December 31, 2014 and 2013

(In millions of won)

	December 31, 2013
	Notional amounts				Carrying amounts
	Buy		Sell		Asset			Liability
Trading purpose derivative financial instruments:
Interest rate	W	266,390,480		267,034,987		1,490,043			1,451,269
Currency		52,285,925		50,541,850		2,167,852			2,068,589
Stock		14,807		66,362		1,375			79
Commodities		443,279		443,279		747			747
Embedded derivatives		365,975		—		38,790			—
Allowance and other adjustment		—		—		(9,857	)		2,683
		319,500,466		318,086,478		3,688,950			3,523,367
Hedging purpose derivative financial instruments:
Interest rate		12,163,375		12,163,375		472,907			120,809
Currency		5,418,326		5,481,823		158,774			235,955
Allowance and other adjustment		—		—		(1,359	)		(30	)
		17,581,701		17,645,198		630,322			356,734
	W	337,082,167		335,731,676		4,319,272			3,880,101

66

Korea Development Bank

Notes to the Separate Financial Statements—(Continued)

For the years ended December 31, 2014 and 2013

(In millions of won)

10. Investments in Subsidiaries and Associates

(1) Investments in subsidiaries and associates as of December 31, 2014 and 2013 are as follows:

	December 31, 2014		December 31, 2013
Subsidiaries:
KDB Asia Ltd.	W	214,807		214,807
KDB Ireland Ltd.		62,389		62,389
KDB Bank Uzbekistan		47,937		47,937
KDB Bank Europe Ltd.		151,952		151,952
Banco KDB Do Brazil S.A(*1)		35,848		—
Daewoo Securities Co., Ltd.		1,775,758		—
KDB Capital Corporation		597,290		—
KDB Asset Management Co., Ltd.		63,356		—
Korea Infrastructure Investment Asset Management Co., Ltd.		16,843		—
Korea Infrastructure Fund		14,917		30,861
KDB Consus Value PEF(*2)		163,766		191,801
KDB Value PEF VI(*3)		1,636,000		1,565,968
KDB Turn Around PEF(*4)		2,651		3,981
Components and Materials M&A PEF(*5)		63,352		142,184
KoFC-KDB Materials and Components Investment Fund No.1		46,090		27,500
Busan Hi-technology Industrial Complex		150		150
Korea BTL Fund I(*6)		227,693		—
Korea Railroad Fund I(*6)		211,628		—
KDB electronic power PEF(*6)		68,144		—
Korea Education Fund(*6)		75,249		—
KDB Value PEF VII		31,630		—
KDB Sigma PEF		68,174		—
KTB Korea-Austalia Global Cooperation Fund		17,136		—
KDBC IP Investment Fund 2		8,057		—
KoFC-KIS Pioneer Champ 2010-4 venture investment fund		18,498		—
KoFC-KBIC Frontier Champ 2010-5 PEF		26,175		—
	W	5,645,490		2,439,530

67

Korea Development Bank

Notes to the Separate Financial Statements—(Continued)

For the years ended December 31, 2014 and 2013

(In millions of won)

	December 31, 2014		December 31, 2013
Associates:
Korea Electric Power Co., Ltd.	W	16,044,556		—
Daewoo Shipbuilding & Marine Engineering Co., Ltd.		1,052,166		1,052,166
Korea Aerospace Industries Co., Ltd.		273,830		—
Korea Tourism Organization		337,286		—
Korea Appraisal Board		58,492		—
Korea Marine Guarantee Insurance		29,856		—
GM Korea Company		287,774		287,774
Korea BTL Fund I(*6)		—		239,227
Korea Railroad Fund I(*6)		—		200,895
KDB electronic power PEF(*6)		—		92,278
Korea Education Fund(*6)		—		85,115
Korea Infrastructure Fund II		181,289		162,835
Troika Resources Investment PEF(*7)		101,775		133,311
Shinbundang Railroad Co., Ltd.(*8)		29,072		30,999
Daehan Shipbuilding Co., Ltd.(*9)		—		10,209
Others(*10)		2,817,076		237,323
		21,213,172		2,532,132
	W	26,858,662		4,971,662

(*1) The Bank recognized W72,410 million and W48,523 million as impairment losses for the funds held for the year ended December 31, 2014 and 2013 respectively, due to the decrease in net asset value from the deteriorating rate of return for the funds.

(*2) The Bank recognized W31,239 million as impairment losses considering the decline in the value in use of the subsidiary, KDB Life Insurance Co., Ltd. (discount rate of 10%) due to reduced rates of return on investments, changes in RBC policy, and other changes in actuarial assumptions as indications of impairment for the year ended December 31, 2014. The Bank also recognized W69,994 million as impairment losses considering the decrease in the value in use of KDB Life Insurance Co., Ltd (discount rate of 10%) due to declined rates of return on investments and values of new contracts as indications of impairment for the year ended December 31, 2013.

(*3) The Bank recognized W860,613 million of impairment losses considering the declined value in use for the subsidiary, Daewoo Engineering & Construction Co., Ltd. (discount rate of 9.92%), due to the contraction of the foreign and domestic construction markets as an indications of impairment for the year ended December 31, 2013.

(*4) The Bank recognized W1,330 million and W10,464 million of impairment losses considering reduced recoverable amounts of loan receivables resulting from financial troubles due to poor management of the subsidiary, SunStar Co., Ltd., and declined net asset values as indications of impairment for the years ended December 31, 2014 and 2013.

(*5) The Bank recognized W4,832 million and W23,572 million of impairment losses for the years ended December 31, 2014 and 2013, considering the decline in net asset values due to the decrease in fair value of unlisted stocks held as indications of impairment.

68

Korea Development Bank

Notes to the Separate Financial Statements—(Continued)

For the years ended December 31, 2014 and 2013

(In millions of won)

(*6) KDB Asset Management Co., Ltd. and KDB Infrastructure Investment Asset Management Co., Ltd. are merged with the Bank, through beneficiary certificates that were invested in by the Bank, and managed by KDB Asset Management Co., Ltd. and KDB Infrastructure Investment Asset Management Co., Ltd, and therefore, are included in the consolidation

(*7) The Bank recognized W81,924 million as impairment losses considering the decrease in fair values of assets held due to the decline in expected cash flows as indications of impairment for the year ended December 31, 2014.

(*8) The Bank recognized W1,927 million as impairment losses considering the encroachment of capital flow due to the delayed opening of railway, and uncollected deposit of operating income as indications of impairment for the year ended December 31, 2014.

(*9) The Bank recognized W8,961 million and W76,571 million as impairment losses considering the decline in value in use of Daehan Shipbuilding Co., Ltd. (discount rate of 8.86%) due to decreased order volumes and increased contract cancellations resulting from the recession in the shipbuilding industry as indications of impairment for the years ended December 31, 2014 and 2013. The recoverable amounts are W1,248 million and W10,209 million as of December 31, 2014 and 2013. Daehan Shipbuilding Co., Ltd. entered into corporate restructuring as of July 7, 2014, and therefore, is categorized as available-for-sale financial assets as of December 31, 2014.

(*10) The Bank recognized W8,463 million as impairment losses for GT&E Co. Ltd. and 7 other companies during the year ended December 31, 2014, and recognized the value in use of W16,788 million as the recoverable amount as of December 31, 2014. The Bank recognized W5,654 million as impairment losses for Arena Park Development Co. Ltd. and 7 other companies during the year ended December 31, 2013, and recognized the value in use of W10,110 million as the recoverable amount as of December 31, 2013.

(2) The market value of marketable investments in subsidiaries and associates as of December 31, 2014 and 2013 are as follows:

	Market value				Carrying amounts
	December 31, 2014		December 31, 2013		December 31, 2014		December 31, 2013
Daewoo Shipbuilding & Marine Engineering Co., Ltd.	W	1,123,050		2,107,601		1,052,166		1,052,166
STX Corporation(*1)		39,928		—		10,507		—
STX Offshore & Shipbuilding
Co., Ltd.(*1)(*2)		—		68,487		373		10
STX Heavy Industries Co., Ltd(*1)(*3)		32,012		58,773		2,769		18
STX Engine Co,. Ltd.(*1)(*3)		14,565		19,088		4		4
Daewoo Securities Co., Ltd.		1,380,932		—		1,775,758		—
Korea Electric Power Co., Ltd.		8,205,229		—		16,044,556		—
Korea Aerospace Industries Co., Ltd.		1,024,689		—		273,830		—

(*1) The Bank was able to obtain significant influence due to The Creditor Financial Institutions Committee’s debt-for-equity swap decision based upon the Corporate Restructuring Promotion Act.

(*2) Active market disappeared as the equity investment was delisted in June 2014.

(*3) The active market for the equity investments disappeared because stock trading was suspended in June 2014. Therefore, the value represents the closing price previous to the trading suspension.

69

Korea Development Bank

Notes to the Separate Financial Statements—(Continued)

For the years ended December 31, 2014 and 2013

(In millions of won)

(3) The key financial information of subsidiaries and associates invested and ownership ratios as of and for the years ended December 31, 2014 and 2013 are as follows:

	December 31, 2014
	Country	Fiscal year end	Industry	Assets		Liabilities		Equity		Operating revenue		Net income (loss)			Total Comprehe -nsive income (loss)			Ratio (%)
Subsidiaries :
KDB Asia Ltd.	Hongkong	December	Finance	W	1,124,490		847,410		277,080		45,750		16,485			30,866			100.00
KDB Ireland Ltd.	Ireland	December	Finance		355,636		274,930		80,706		18,002		4,867			8,324			100.00
KDB Bank Uzbekistan	Uzbekisatan	December	Finance		950,334		862,194		88,140		39,772		17,759			11,011			86.34
KDB Bank Europe Ltd.	Hungary	December	Finance		767,681		674,827		92,854		69,839		(31,021	)		(51,187	)		100.00
Banco KDB Do Brazil S.A	Brazil	December	Finance		217,013		178,749		38,264		167,978		(41,478	)		(53,198	)		100.00
Daewoo Securities Co., Ltd.(*1)	Korea	December	Finance		30,613,292		26,439,033		4,174,259		4,021,794		205,195			310,940			43.00
KDB Capital Corporation	Korea	December	Finance		4,300,919		3,698,273		602,646		431,770		105,251			132,007			99.92
KDB Asset Management Co., Ltd.	Korea	December	Finance		83,646		20,291		63,355		15,784		1,298			1,295			100.00
Korea Infrastructure Investment Asset Management Co., Ltd.	Korea	December	Finance		24,538		4,525		20,013		14,454		6,303			6,249			84.16
Korea Infrastructure Fund	Korea	December	Financial investment		15,349		6		15,343		4,635		4,445			4,445			85.00
KDB Consus Value PEF(*1)	Korea	December	Financial investment		13,884,320		13,308,596		575,724		3,350,635		(76,306	)		53,377			40.78
KDB Value PEF VI	Korea	December	Financial investment		11,892,982		8,505,662		3,387,320		10,371,775		(100,766	)		(137,814	)		99.84
KDB Turn Around PEF	Korea	December	Financial investment		3,625		—		3,625		40		(1,613	)		(1,613	)		95.17
Components & Materials M&A PEF	Korea	December	Financial investment		87,495		5,545		81,950		3,050		(4,098	)		22,224			83.33
KoFC-KDB Materials and Components Investment Fund No.1	Korea	December	Financial investment		43,180		—		43,180		2,008		(3,517	)		(3,517	)		100.00
Korea BTL Fund I(*3)	Korea	December	Financial investment		554,660		379		554,281		27,119		25,412			25,412			41.67
Korea Railroad Fund I(*3)	Korea	December	Financial investment		430,037		17		430,020		18,973		17,943			17,943			50.00
KDB electronic power PEF(*3)	Korea	December	Financial investment		134,197		24		134,173		10,826		10,420			10,420			50.00
Korea Education Fund(*3)	Korea	December	Financial investment		151,977		9		151,968		7,113		6,708			6,708			50.00
KDB Value PEF VII(*1)	Korea	December	Financial investment		123,758		63,522		60,236		2,150		(5,582	)		(3,024	)		50.00
KDB Sigma PEF	Korea	December	Financial investment		471,703		393,787		77,916		104,410		(34,082	)		(34,082	)		60.87
KTB Korea-Australia Global Cooperation Fund	Korea	December	Financial investment		18,735		697		18,038		3		(1,687	)		(1,687	)		95.00
KoFC-KBIC Frontier Champ 2010-5 PEF(*1)	Korea	December	Financial investment		52,499		148		52,351		15,842		957			(2,292	)		50.00

70

Korea Development Bank

Notes to the Separate Financial Statements—(Continued)

For the years ended December 31, 2014 and 2013

(In millions of won)

	December 31, 2014
	Country	Fiscal year end	Industry	Assets		Liabilities		Equity			Operating revenue			Net income (loss)			Total Comprehe -nsive income (loss)			Ratio (%)
Associates :
Korea Electric Power Co., Ltd.	Korea	December	Electricity Generation	W	163,708,289		108,883,279		54,825,010			57,474,883			2,686,873			2,335,827			29.93
Daewoo Shipbuilding & Marine Engineering Co., Ltd.	Korea	December	Manufacturing		20,289,610		15,526,007		4,763,603			16,786,279			32,952			52,369			31.46
Korea Aerospace Industries Co., Ltd.	Korea	December	Manufacturing		2,096,813		1,060,083		1,036,730			2,314,884			111,109			94,736			26.41
Korea Tourism Organization	Korea	December	Culture and Tourism administration		1,395,195		409,939		985,256			887,595			18,633			13,826			43.58
Korea Appraisal Board	Korea	December	Appraisal		221,905		30,734		191,171			113,836			9,585			9,585			30.60
Korea Marine Guarantee Insurance	Korea	December	Finance		59,712		—		59,712			—			—			—			50.00
GM Korea Company(*4)	Korea	December	Manufacturing		8,296,545		6,713,083		1,583,462			15,485,362			(74,753	)		(135,102	)		17.02
Korea Infrastructure Fund II	Korea	December	Financial investment		689,143		1,326		687,817			46,448			39,239			39,239			26.67
Troika Resources Investment PEF	Korea	December	Financial investment		186,853		1,613		185,240			(89,978	)		(120,812	)		(120,812	)		45.79
Shinbundang Railroad Co., Ltd.(*5)	Korea	December	Other		809,742		876,455		(66,713	)		56,004			(66,074	)		(66,074	)		10.98

71

Korea Development Bank

Notes to the Separate Financial Statements—(Continued)

For the years ended December 31, 2014 and 2013

(In millions of won)

	December 31, 2013
	Country	Fiscal year end	Industry	Assets		Liabilities		Equity			Operating revenue			Net income (loss)			Total Comprehe -nsive income (loss)			Ratio (%)
Subsidiaries :
KDB Asia Ltd.	Hongkong	December	Finance	W	847,478		590,224		257,254			54,675			17,408			6,203			100.00
KDB Ireland Ltd.	Ireland	December	Finance		355,293		277,391		77,902			20,927			5,074			3,688			100.00
KDB Bank Uzbekistan	Uzbekistan	December	Finance		852,484		773,554		78,930			37,058			17,313			9,291			86.34
KDB Bank Europe Ltd.	Hungary	December	Finance		1,167,824		1,023,783		144,041			91,684			5,871			6,536			100.00
Banco KDB Do Brazil S.A	Brazil	December	Finance		232,742		249,126		(16,384	)		80,008			(47,828	)		(52,405	)		100.00
Korea Infrastructure Fund	Korea	December	Financial investment		32,998		13		32,985			2,376			2,038			2,038			85.00
KDB Consus Value PEF(*1)	Korea	December	Financial investment		12,480,110		12,014,285		465,825			3,485,533			(102,895	)		(174,390	)		40.71
KDB Value PEF III	Korea	December	Financial investment		107		7		100			194			(7,969	)		(1,761	)		100.00
KDB Value PEF VI	Korea	December	Financial investment		11,976,687		8,497,564		3,479,123			9,070,118			(532,624	)		(582,550	)		99.84
KDB Turn Around PEF	Korea	December	Financial investment		5,535		296		5,239			135			(2,537	)		9,095			95.17
Components and Materials M&A PEF	Korea	December	Financial investment		154,865		6,175		148,690			23,781			(32,510	)		(43,462	)		83.33
KoFC-KDB Materials and Components Investment Fund No.1	Korea	December	Financial investment		52,697		—		52,697			1,873			(2,435	)		(2,435	)		50.00
Associates :
Daewoo Shipbuilding & Marine Engineering Co., Ltd.	Korea	December	Manufactur -ing	W	18,488,879		13,709,509		4,779,370			15,305,281			241,893			303,528			31.46
GM Korea Company(*4)	Korea	December	Manufactur -ing		10,082,452		8,366,881		1,715,571			18,624,412			(695,856	)		(695,856	)		17.02
Korea BTL Fund I	Korea	December	Financial investment		583,292		398		582,894			29,016			27,216			27,216			41.67
Korea Railroad Fund I	Korea	December	Financial investment		408,373		15		408,358			18,947			17,915			17,915			50.00
Korea Infrastructure Fund II	Korea	December	Financial investment		666,116		50,832		615,284			44,253			33,133			33,133			26.67
Troika Resources Investment PEF	Korea	December	Financial investment		234,373		1,344		233,029			(10,814	)		(15,946	)		(15,946	)		45.93
KDB electronic power PEF	Korea	December	Financial investment		181,937		2,493		179,444			12,947			4,962			4,962			50.00
Korea Education Fund	Korea	December	Financial investment		172,704		9		172,695			9,000			8,544			8,544			50.00
Shinbundang Railroad Co., Ltd.(*5)	Korea	December	Other		838,124		838,763		(639	)		49,321			(77,381	)		(77,381	)		10.98

(*1) Although the Bank holds less than half of all voting rights, it is considered to have significant control of KDB Consus Value PEF. The Bank is notably open to variable profit of the investee company’s performance and influences variable profit through the decision of performance.

(*2) Although the controlling entity holds less than half of the other entity’s voting rights, the controlling entity exercised its power as an executive member, influenced the other entity’s profit, and is exposed to variable profit, and therefore, the other entity is included in the Group.

72

Korea Development Bank

Notes to the Separate Financial Statements—(Continued)

For the years ended December 31, 2014 and 2013

(In millions of won)

(*3) Although the Group holds less than half of the voting rights, through the beneficiary certificates that were invest by the Bank and managed by KDB Infrastructure Investment Asset Management Co., Ltd., the Group is exposed to the variable profit of the investee, and can influence the investee’s variable profit, and therefore, the investee is included in the consolidation.

(*4) Although the Bank’s ownership of GM Korea Company is less than 20%, the equity method is applied as the Bank is considered to have significant influence over GM Korea Company by exercising rights to elect board of directors, etc. The Bank used the financial statement of GM Korea Company as of September 30, 2014 in applying the equity method since the Bank was not able to obtain the financial statement as of December 31, 2014. The Bank made adjustments for the effects of any significant events or transactions that occurred between the date of the investee’s financial statement and the date of the Bank’s financial statement.

(*5) The ownership ratio of Shinbundang Railroad Co. Ltd. is above 20% upon the consideration of shares owned by the Bank’s subsidiaries. Therefore, the Bank exercises significant influence over associate Shinbundang Railroad.

11. Property and Equipment

Changes in property and equipment for the years ended December 31, 2014 and 2013 are as follows:

	2014
	January 1, 2014		Acquisition/ depreciation		Disposal			Reclassification			Foreign exchange differences			Acquisition of parent company		December 31, 2014
Acquisition cost:
Land	W	206,294		9,448		(1,996	)		12,332			(20	)		30,731		256,789
Buildings and structures		293,514		10,777		(1,364	)		22,056			(53	)		49,196		374,126
Leasehold improvements		27,521		602		(657	)		2,386			(68	)		502		30,286
Vehicles		1,173		267		(154	)		—			8			—		1,294
Equipment		40,385		2,580		(901	)		—			(60	)		4,364		46,368
Construction in progress		—		5,987		—			(5,863	)		—			—		124
Others		92,068		8,750		(766	)		—			22			12,028		112,102
		660,955		38,411		(5,838	)		30,911			(171	)		96,821		821,089
Accumulated depreciation:
Buildings and structures		98,398		8,796		(602	)		8,350			(46	)		19,016		133,912
Leasehold improvements		18,295		4,451		(637	)		—			(98	)		499		22,510
Vehicles		880		160		(154	)		—			3			—		889
Equipment		30,086		3,217		(871	)		—			(65	)		3,610		35,977
Others		68,152		9,923		(752	)		—			12			9,268		86,603
		215,811		26,547		(3,016	)		8,350			(194	)		32,393		279,891
Impairment loss:
Land		3,023		—		—			—			—			—		3,023
Buildings and structures		2,361		—		—			—			—			—		2,361
		5,384		—		—			—			—			—		5,384
	W	439,760		11,864		(2,822	)		22,561			23			64,428		535,814

73

Korea Development Bank

Notes to the Separate Financial Statements—(Continued)

For the years ended December 31, 2014 and 2013

(In millions of won)

	2013
	January 1, 2013		Acquisition/ depreciation			Disposal			Reclassification			Foreign exchange differences			December 31, 2013
Acquisition cost:
Land	W	199,865		—			(82	)		6,568			(57	)		206,294
Buildings and structures		286,590		1,148			(1,401	)		7,872			(695	)		293,514
Leasehold improvements		26,346		651			(619	)		1,716			(573	)		27,521
Vehicles		1,136		262			(179	)		—			(46	)		1,173
Equipment		38,315		3,348			(1,142	)		—			(136	)		40,385
Construction in progress		100		3,778			—			(3,878	)		—			—
Others		83,748		9,505			(1,105	)		—			(80	)		92,068
		636,100		18,692			(4,528	)		12,278			(1,587	)		660,955
Accumulated depreciation:
Buildings and structures		88,165		8,959			(632	)		2,180			(274	)		98,398
Leasehold improvements		13,441		5,773			(617	)		—			(302	)		18,295
Vehicles		832		129			(51	)		—			(30	)		880
Equipment		28,297		3,024			(1,124	)		—			(111	)		30,086
Others		60,208		9,102			(1,103	)		—			(55	)		68,152
		190,943		26,987			(3,527	)		2,180			(772	)		215,811
Impairment loss:
Land		3,023		—			—			—			—			3,023
Buildings and structures		2,361		—			—			—			—			2,361
		5,384		—			—			—			—			5,384
	W	439,773		(8,295	)		(1,001	)		10,098			(815	)		439,760

74

Korea Development Bank

Notes to the Separate Financial Statements—(Continued)

For the years ended December 31, 2014 and 2013

(In millions of won)

12. Investment Property

Changes in investment property for the years ended December 31, 2014 and 2013 are as follows:

	2014
	January 1, 2014		Acquisition/ depreciation			Reclassification			Acquisition of parent company		December 31, 2014
Acquisition cost:
Land	W	55,455		—			(12,332	)		9,467		52,590
Buildings and structures		43,151		—			(18,579	)		14,241		38,813
		98,606		—			(30,911	)		23,708		91,403
Accumulated depreciation:
Buildings and structures		14,936		1,559			(8,350	)		5,644		13,789
Accumulated impairment loss:
Land		1,197		—			—			—		1,197
Buildings and structures		1,778		—			—			—		1,778
		2,975		—			—			—		2,975
	W	80,695		(1,559	)		(22,561	)		18,064		74,639

Fair value of the Bank’s investment property, as determined on the basis of valuation by an independent appraiser, amounts to W78,524 million as of December 31, 2014 (W88,091 million as of December 31, 2013). Additionally, fair value of investment in property is classified as level 3 according to the fair value hierarchy in Note 43.

	2013
	January 1, 2013		Acquisition/ depreciation			Reclassification			December 31, 2013
Acquisition cost:
Land	W	62,023		—			(6,568	)		55,455
Buildings and structures		48,862		—			(5,710	)		43,152
		110,885		—			(12,278	)		98,607
Accumulated depreciation:
Buildings and structures		15,424		1,693			(2,180	)		14,937
Accumulated impairment loss:
Land		1,197		—			—			1,197
Buildings and structures		1,778		—			—			1,778
		2,975		—			—			2,975
	W	92,486		(1,693	)		(10,098	)		80,695

75

Korea Development Bank

Notes to the Separate Financial Statements—(Continued)

For the years ended December 31, 2014 and 2013

(In millions of won)

13. Intangible Assets

Changes in intangible assets for the years ended December 31, 2014 and 2013 are as follows:

	2014
	January 1, 2014		Acquisition		Disposal			Amortization			Impairment loss			Foreign exchange differences			Acquisition of parent company		December 31, 2014
Development expense	W	56,411		12,088		—			(17,313	)		—			2			9,931		61,119
Equipment usage right		877		—		—			(57	)		—			27			—		847
Other deposits provided		10,906		363		(211	)		—			(738	)		(1	)		1,336		11,655
Others		17,457		4,289		—			(7,301	)		—			(49	)		2,827		17,223
	W	85,651		16,740		(211	)		(24,671	)		(738	)		(21	)		14,094		90,844

	2013
	January 1, 2013		Acquisition		Disposal		Amortization			Foreign exchange differences			December 31, 2013
Development expense	W	44,259		24,706		—		(12,554	)		—			56,411
Equipment usage right		949		—		5		(63	)		(14	)		877
Other deposits provided		10,904		14		—		—			(12	)		10,906
Others		15,391		8,798		—		(6,730	)		(2	)		17,457
	W	71,503		33,518		5		(19,347	)		(28	)		85,651

14. Other Assets

Other assets as of December 31, 2014 and 2013 are as follows:

	December 31, 2014			December 31, 2013
Accounts receivable	W	4,185,497			2,720,714
Unsettled domestic exchange receivables		604,080			851,673
Accrued income		496,646			436,844
Guarantee deposits		161,942			160,619
Financial guarantee asset		40,524			40,711
Prepaid expenses		7,007			8,175
Advance payments		874			741
Others		35,319			28,558
		5,531,889			4,248,035
Allowance for possible losses		(70,281	)		(72,941	)
Present value discount		(5,250	)		(5,192	)
	W	5,456,358			4,169,902

The carrying amount of financial assets included in other assets above amounted to W5,421,457 million as of December 31, 2014, (W4,139,475 million as of December 31, 2013) and their fair value amounted to W5,422,962 million as of December 31, 2014 (W4,144,727 million as of December 31, 2013).

76

Korea Development Bank

Notes to the Separate Financial Statements—(Continued)

For the years ended December 31, 2014 and 2013

(In millions of won)

15. Financial Liabilities Designated at Fair Value Through Profit or Loss

(1) Financial liabilities designated at fair value through profit or loss as of December 31, 2014 and 2013 are as follows:

	December 31, 2014		December 31, 2013
Borrowings	W	4,958		9,289
Bonds		1,133,670		668,627
	W	1,138,628		677,916

The borrowings designated at “Fair Value Through Profit or Loss” (FVTPL) consist of equity-index-linked securities. Through designating embedded derivatives and host contracts as FVTPL items, changes in fair value of complex financial products are recognized in profit or loss. Changes in fair value of structured bonds which hedge accounting are applied, are recognized in profit or loss, but structured bonds with no hedge accounting applied, are measured at amortized costs. Therefore, such structured bonds, not applied by hedge accounting, have been designated at FVTPL in order to eliminate mismatch in measurements of accounting profit and loss.

(2) The difference between the carrying amount and contractual cash flow amount of financial liabilities designated at fair value through profit or loss as of December 31, 2014 and 2013 are as follows:

	December 31, 2014		December 31, 2013
Carrying amount	W	1,138,628		677,916
Contractual cash flow amounts		950,994		560,201
Difference	W	187,634		117,715

16. Deposits

Deposits as of December 31, 2014 and 2013 are as follows:

	December 31, 2014				December 31, 2013
	Amortized cost		Fair value		Amortized cost		Fair value
Deposits in Korean won:
Demand deposits	W	160,806		160,806		286,104		286,104
Time and savings deposits		31,663,351		31,712,090		31,408,611		31,423,333
Certificates of deposit		108,786		109,096		72,914		73,027
		31,932,943		31,981,992		31,767,629		31,782,464
Deposits in foreign currencies:
Demand deposits		744,665		744,665		1,936,949		1,936,949
Time and savings deposits		1,813,628		1,813,962		2,397,261		2,398,323
Certificates of deposit		2,978,027		2,980,481		1,625,431		1,626,113
		5,536,320		5,539,108		5,959,641		5,961,385
Off-shore deposits in foreign currencies:
Demand deposits		136,451		136,451		—		—
	W	37,605,714		37,657,551		37,727,270		37,743,849

77

Korea Development Bank

Notes to the Separate Financial Statements—(Continued)

For the years ended December 31, 2014 and 2013

(In millions of won)

17. Borrowings

(1) Borrowings as of December 31, 2014 and 2013 are as follows:

	December 31, 2014
	Minimum interest rate (%)		Maximum interest rate (%)		Amortized cost			Fair value
Borrowings in Korean won		0.00		5.05	W	7,454,823			7,459,870
Borrowings in foreign currencies		0.02		6.65		10,215,872			10,281,576
Off-shore borrowings in foreign currencies		0.19		4.28		1,923,739			1,926,752
Others		0.05		5.15		3,947,181			3,949,164
						23,541,615			23,617,362
Deferred borrowing costs						(4,084	)
					W	23,537,531

	December 31, 2013
	Minimum interest rate (%)		Maximum interest rate (%)		Amortized cost			Fair value
Borrowings in Korean won		0.22		5.30	W	4,605,373			4,605,345
Borrowings in foreign currencies		0.01		6.20		10,676,197			10,699,495
Off-shore borrowings in foreign currencies		0.19		4.27		2,262,188			2,265,441
Others		0.05		8.90		5,685,391			5,686,032
						23,229,149			23,256,313
Deferred borrowing costs						(8,376	)
					W	23,220,773

78

Korea Development Bank

Notes to the Separate Financial Statements—(Continued)

For the years ended December 31, 2014 and 2013

(In millions of won)

(2) Borrowings in Korean won before adjusting for gains and losses on deferred borrowing costs as of December 31, 2014 and 2013 are as follows:

Lender	Classification	Annual interest rate (%)		December 31, 2014		December 31, 2013
Ministry of Strategy and Finance	Borrowings from government fund(*)		1.46 ~ 5.00	W	495,587		564,288
Industrial Bank of Korea	Borrowings from industrial technology fund		0.77 ~ 2.40		3,092		2,425
Small & Medium Business Corp.	Borrowings from small and medium enterprise promotion fund		1.52 ~ 3.91		248,825		306,085
Ministry of Culture and Tourism	Borrowings from tourism promotion fund		0.21 ~ 2.50		1,490,344		1,222,208
Korea Energy Management Corporation	Borrowings from fund for rational use of energy		0.25 ~ 3.75		1,151,113		1,187,543
Local governments	Borrowings from local small and medium enterprise promotion fund		1.00 ~ 5.05		88,033		95,204
The Bank of Korea	Borrowings from Bank of Korea		0.50 ~ 1.00		3,702,438		—
Others	Borrowings from environment improvement support fund		0.00 ~ 3.35		275,391		1,227,800
				W	7,454,823		4,605,373

(*) Borrowings from government fund are subordinated borrowings.

79

Korea Development Bank

Notes to the Separate Financial Statements—(Continued)

For the years ended December 31, 2014 and 2013

(In millions of won)

(3) Borrowings and off-shore borrowings in foreign currencies before adjusting for gains and losses on deferred borrowing costs as of December 31, 2014 and 2013 are as follows:

Lender	Classification	Annual interest rate (%)	December 31, 2014		December 31, 2013
Japan Bank for International Cooperation (“JBIC”)	Borrowings from JBIC	1.44 ~ 2.16	W	218,227		288,502
Mizuho and others	Bank loans from foreign funds	3M Libor+0.40 ~ 3M Telerate+1.95		1,209,120		2,307,530
Ministry of Strategy and Finance	Exchange equalization fund borrowings in foreign currencies	3M Libor+0.35 ~ 3M Libor+0.69		1,015,786		—
Citi Bank and others	Off-shore short term borrowings	0.19 ~ 0.20		1,101,689		1,109,858
		3M Telerate+0.50		32,976		31,659
		9M Telerate+0.35		—		73,871
		1Y Telerate+0.40		—		52,765
				1,134,665		1,268,153
BNP-Paribas and Others	Off-shore long term borrowings	3M Libor+0.30 ~ 3M Libor+0.75		353,783		551,713
		3M Libor+0.75 ~ 3M Telerate+0.75		329,760		316,590
				683,543		868,303
Japan Bank for International Cooperation (“JBIC”)	Off-shore borrowings from JBIC	1.79		67,850		83,526
		4.27 ~ 6M Libor+1.20		37,681		42,206
				105,531		125,732
Others	Short term borrowings in foreign currencies	0.02 ~ 6.65		5,767,387		6,007,762
	Long term borrowings in foreign currencies	0.10 ~ 6.50		2,005,352		2,072,403
			W	12,139,611		12,938,385

80

Korea Development Bank

Notes to the Separate Financial Statements—(Continued)

For the years ended December 31, 2014 and 2013

(In millions of won)

18. Bonds

(1) Bonds as of December 31, 2014 and 2013 are as follows:

	December 31, 2014
	Minimum interest rate (%)		Maximum interest rate  (%)		Amortized cost			Fair value
Bonds in Korean won:
Bonds		2.03		8.43	W	91,051,171			92,616,911
Discount on bonds						(34,211	)
Premium on bonds						4
Valuation adjustment for fair value hedges						184,771
						91,201,735			92,616,911
Bonds in foreign currencies:
Bonds		3M Libor+0.20		3M Libor+2.58		17,062,488			17,160,814
Discount on bonds						(43,900	)
Premium on bonds						9,086
Valuation adjustment for fair value hedges						(412,758	)
						16,614,916			17,160,814
Off-shore bonds:
Bonds		3M Libor+0.24		3M Libor+4.30		9,049,836			8,925,601
Discount on bonds						(23,180	)
Premium on bonds						8,324
Valuation adjustment for fair value hedges						(281,835	)
						8,753,145			8,925,601
					W	116,569,796			118,703,326

81

Korea Development Bank

Notes to the Separate Financial Statements—(Continued)

For the years ended December 31, 2014 and 2013

(In millions of won)

	December 31, 2013
	Minimum interest rate (%)	Maximum interest rate (%)	Amortized cost			Fair value
Bonds in Korean won:
Bonds	2.42	8.05	W	37,230,294			37,236,767
Discount on bonds				(37,739	)
Valuation adjustment for fair value hedges				33,534
				37,226,089			37,236,767
Bonds in foreign currencies:
Bonds	3M Libor+0.24	3M Libor+6.28		11,760,585			12,262,063
Discount on bonds				(32,036	)
Premium on bonds				14,098
Valuation adjustment for fair value hedges				(66,308	)
				11,676,339			12,262,063
Off-shore bonds:
Bonds	3M Libor+0.005	3M Libor+6.18		7,283,719			7,233,416
Discount on bonds				(20,845	)
Premium on bonds				14,103
Valuation adjustment for fair value hedges				(254,537	)
				7,022,440			7,233,416
			W	55,924,868			56,732,246

82

Korea Development Bank

Notes to the Separate Financial Statements—(Continued)

For the years ended December 31, 2014 and 2013

(In millions of won)

19. Defined Benefit Liabilities

The Bank implements a defined benefit retirement pension plan based on employee compensation benefits and service periods. The plan assets are in trusts with Kookmin Bank, Samsung Life Insurance co., Ltd., etc.

(1) Details of defined benefit liabilities as of December 31, 2014 and 2013 are as follows:

	December 31, 2014			December 31, 2013
Present value of defined benefit liabilities	W	211,148			203,285
Fair value of plan assets		(179,018	)		(178,119	)
	W	32,130			25,166

(2) Changes in defined benefit liabilities for the years ended December 31, 2014 and 2013 are as follows:

	2014
	Present value of defined benefit liabilities			Fair value of plan assets			Defined benefit liabilities (assets)
Beginning balance	W	203,285			(178,119	)		25,166
Current service costs		36,288			—			36,288
Past service costs		(2,237	)		—			(2,237	)
Interest expense (income)		8,199			(7,545	)		654
Remeasurements of defined benefit liabilities:
Demographic assumption		(63,526	)		—			(63,526	)
Financial assumption		23,894			2,966			26,860
Experience adjustment		3,101			—			3,101
		(36,531	)		2,966			(33,565	)
Benefits paid by the plan		(9,080	)		8,680			(400	)
Contribution		—			(5,000	)		(5,000	)
Acquisition of parent company		11,224			—			11,224
Ending balance	W	211,148			(179,018	)		32,130

	2013
	Present value of defined benefit liabilities			Fair value of plan assets			Defined benefit liabilities (assets)
Beginning balance	W	183,401			(164,516	)		18,885
Current service costs		36,225			—			36,225
Interest expense (income)		6,529			(5,999	)		530
Remeasurements of defined benefit liabilities:
Demographic assumption		(2,278	)		—			(2,278	)
Financial assumption		1,697			766			2,463
Experience adjustment		(10,185	)		—			(10,185	)
		(10,766	)		766			(10,000	)
Benefits paid by the plan		(12,104	)		12,032			(72	)
Contribution		—			(20,402	)		(20,402	)
Ending balance	W	203,285			(178,119	)		25,166

83

Korea Development Bank

Notes to the Separate Financial Statements—(Continued)

For the years ended December 31, 2014 and 2013

(In millions of won)

(3) Fair value of plan assets for each type as of December 31, 2014 and 2013 are as follows:

	December 31, 2014				December 31, 2013
	Quoted market prices		Unquoted market prices		Quoted market prices		Unquoted market prices
Due from banks	W	—		179,018		—		178,119

(4) Defined benefit costs recognized in profit or loss for the years ended December 31, 2014 and 2013 are as follows:

	December 31, 2014			December 31, 2013
Current service costs	W	36,288			36,225
Past service costs		(2,237	)		—
Interest expense (income), net		654			530
	W	34,705			36,755

(5) The principal actuarial assumptions used as of December 31, 2014 and 2013 are as follows:

	December 31, 2014		December 31, 2013
Discount rate (%)		3.28		4.27
Future salary increasing rate (%)		5.96		5.60

(6) The present value sensitivity of defined benefit liabilities as principal actuarial assumptions change as of December 31, 2014 is as follows:

	Sensitivity
	1% increase  in assumption		1% decrease  in assumption
Discount rate		9.20% decrease		10.81% increase
Future salary increasing rate		10.43% increase		9.07% decrease

(7) The weighted-average expected time to maturity of defined benefit liabilities is 11.5 years as of December 31, 2014 (13.2 years as of December 31, 2013), and the expected contributions to the plan until the upcoming annual reporting period amount to W25,499 million (W9,800 million as of December 31, 2013).

84

Korea Development Bank

Notes to the Separate Financial Statements—(Continued)

For the years ended December 31, 2014 and 2013

(In millions of won)

20. Provisions

(1) Changes in provisions for the years ended December 31, 2014 and 2013 are as follows:

	2014
	Provision for payment guarantees			Provision for unused commitments			Lawsuit provision		Other provision		Total
Beginning balance	W	511,325			25,847			1,881		1,032		540,085
Increase (reversal) of provision		(269,485	)		(6,961	)		7,162		—		(269,284	)
Foreign exchange differences		(599	)		389			—		—		(210	)
Acquisition of parent company		35,124			1,066			—		5,044		41,234
Ending balance	W	276,365			20,341			9,043		6,076		311,825

	2013
	Provision for payment guarantees		Provision for unused commitments			Lawsuit provision			Other provision		Total
Beginning balance	W	49,180		37,031			1,900			1,032		89,143
Increase (reversal) of provision		461,859		(11,208	)		(19	)		—		450,632
Foreign exchange differences		286		24			—			—		310
Ending balance	W	511,325		25,847			1,881			1,032		540,085

(2) Provision for payment guarantees

Confirmed acceptances and guarantees, unconfirmed acceptances and guarantees and bills endorsed are not recognized on the statement of financial position, but are disclosed as off- statement of financial position items in the notes to the financial statements. The Bank provides a provision for such off-statement of financial position items, applying a Credit Conversion Factor (“CCF”) and provision rates, and records the provision as a reserve for possible losses on acceptances and guarantees.

(3) Provision for unused commitments

The Bank records a provision for a certain portion of unused credit lines which is calculated using a CCF as provision for unused commitments applying provision rates.

(4) Provision for possible losses from lawsuits

As of December 31, 2014, the Bank is involved in 15 lawsuits as a plaintiff and 21 lawsuits as a defendant. The aggregate amount of claims as a plaintiff and a defendant amounted to W3,836,075 million and W409,472 million, respectively. The Bank provided a provision against contingent loss from pending lawsuits as of December 31, 2014 and additional losses may be incurred depending on the final result of pending lawsuits.

The financial institution creditors of Renault Samsung Motors (including KDB) filed a lawsuit against Kun-hee Lee and 28 Samsung affiliates (including Samsung Electronics), claiming compensation for delays in payment of liquidated damages and contract bills based on the agreement signed on August 24, 1999. On January 29, 2015, the court decided partially in favour of the plaintiff in the last instance. It is expected to be W103,687 million that Korea Development Bank will receive in 2015.

85

Korea Development Bank

Notes to the Separate Financial Statements—(Continued)

For the years ended December 31, 2014 and 2013

(In millions of won)

Major lawsuits in progress as of December 31, 2014 and 2013 are as follows:

	December 31, 2014
	Contents	Amounts		Status of lawsuit
Plaintiff:
29 Samsung affiliates (including Samsung Electronics)	Deposit contracts, etc.	W	3,711,586	Final ruling (2015.01.29)
Gyenggi Urban Innovation Corporation	Claim for refund of investments		19,100	1st trials in progress
SH Corporation	Claim for damages		9,720	1st trials in progress
Defendant:
Hanhwa Chemical Co., Ltd.	Performance bonds	W	322,593	1st, 2nd trials ruled in favor of the Bank; Pending appeals
KAMCO 8th JV Securitization Specialty Co., Ltd	Claim for refund of impairment sale payment		36,333	1st trials in progress
Gyeonggi Urban Innovation Corporation	Delivery of stocks and Stock transfer, etc		24,348	1st trials in progress

	December 31, 2013
	Contents	Amounts		Status of lawsuit
Plaintiff:
29 Samsung affiliates (including Samsung Electronics)	Deposit contracts, etc.	W	3,711,586	1st,  2nd trials ruled in part favor of the Bank; Pending appeals
Gyenggi Urban Innovation Corporation	Claim for refund of investments		19,100	1st trials in progress
SH Corporation	Claim for damages		9,720	1st trials in progress
Defendant:
Hanhwa Chemical Co., Ltd.	Performance bonds	W	322,593	1st, 2nd trials ruled in favor of the Bank; Pending appeals
Simmtech Co., Ltd.	Claim for damages		115,465	1st trials in progress
Cheonan city	Delivery of stocks, etc.		29,292	1st trials in progress
Standard Chartered Bank Korea Ltd.	Claim for sales billings		20,177	1st trial ruled against the Bank; Pending appeals

In December 2013, the Supreme Court of Korea ruled that all fixed payments such as bonuses and allowances that have been uniformly provided to employees on a regular basis must now be included when calculating the employee’s ordinary wage. As of December 31, 2014, there is no lawsuit related with ordinary wage from the Bank’s employees and management cannot reliably estimate the potential impacts, if any, on the Bank’s financial position, financial performance and cash flows.

86

Korea Development Bank

Notes to the Separate Financial Statements—(Continued)

For the years ended December 31, 2014 and 2013

(In millions of won)

21. Other Liabilities

Other liabilities as of December 31, 2014 and 2013 are as follows:

	December 31, 2014			December 31, 2013
Accounts payable	W	2,662,181			2,674,054
Accrued expense		1,784,532			1,385,434
Advance receipts		1,144			1,311
Unearned income		48,279			37,994
Deposits withholding tax		40,873			25,926
Guarantee money received		89,155			101,319
Foreign exchanges payable		225,199			22,923
Domestic exchanges payable		461,950			285,965
Borrowing from trust accounts		589,081			487,220
Financial guarantee liability		71,323			59,083
Suspense payable		115,356			108,200
Others		133,123			56,956
		6,222,196			5,246,385
Present value discount		(415	)		(434	)
	W	6,221,781			5,245,951

The carrying amount of financial liabilities included in other liabilities above amounted to W5,920,686 million as of December 31, 2014 (W4,982,513 million as of December 31, 2013) and their fair value amounted to W5,920,769 million as of December 31, 2014 (W4,982,526 million as of December 31, 2013).

22. Equity

(1) Issued capital

The Bank is authorized to issue up to 6,000 million shares of common stock and has 3,036,079,768 shares issued as of December 31, 2014 (1,852,372,235 shares issued as of December 31, 2013), and outstanding with a total par value of W15,180,399 million as of December 31, 2014 (W9,261,861 million as of December 31, 2013).

(2) Capital surplus

Capital surplus as of December 31, 2014 and 2013 are as follows:

	December 31, 2014		December 31, 2013
Surplus from capital reduction(*1)	W	44,373		44,373
Other capital surplus(*2)		2,478,496		—

(*1) The Bank reduced W5,178,600 million of its issued capital in 1998 and 2000 to offset its accumulated deficit amounting to W5,134,227 million. As the result of the capital reduction, W44,373 million of surplus exceeding accumulated deficit was recorded in capital surplus in equity.

(*2) The difference in the amount of shares issued and the carrying value of net asset acquired occurring from the merger of the Bank with KDB Financial Group Inc. and Korea Finance Corporation are recognized as other capital surplus.

87

Korea Development Bank

Notes to the Separate Financial Statements—(Continued)

For the years ended December 31, 2014 and 2013

(In millions of won)

(3) Capital adjustments

Capital adjustments as of December 31, 2014 and 2013 are as follows:

	December 31, 2014		December 31, 2013
Discount on stock issuance	W	—		(51	)

(4) Accumulated other comprehensive income

(i) Accumulated other comprehensive income as of December 31, 2014 and 2013 are as follows:

	December 31, 2014			December 31, 2013
Valuation gain on available-for-sale financial assets:
Valuation gain on available-for-sale financial assets (before tax)	W	1,075,984			477,463
Income tax effect		(260,384	)		(115,532	)
		815,600			361,931
Exchange differences on translation of foreign operations:
Exchange differences on translation of foreign operations (before tax)		(37,421	)		(65,523	)
Income tax effect		9,056			15,856
		(28,365	)		(49,667	)
Valuation loss on cash flow hedge
Valuation loss on cash flow hedge (before tax)		(18,293	)		—
Income tax effect		4,427			—
		(13,866	)		—
Remeasurements of defined benefit liabilities:
Remeasurements of defined benefit liabilities (before tax)		59,437			26,661
Income tax effect		(14,384	)		(6,452	)
		45,053			20,209
	W	818,422			332,473

(ii) Changes in accumulated other comprehensive income for the years ended December 31, 2014 and 2013 are as follows:

	2014
	January 1, 2014			Increase (decrease)			Tax effect			Acquisition of parent company			December 31, 2014
Valuation gain on available-for-sale financial assets	W	361,931			64,363			(15,586	)		404,892			815,600
Exchange differences on translation of foreign operations		(49,667	)		28,102			(6,800	)		—			(28,365	)
Valuation loss on cash flow hedge		—			(1,350	)		327			(12,843	)		(13,866	)
Remeasurements of defined benefit liabilities		20,209			33,565			(8,123	)		(598	)		45,053
	W	332,473			124,680			(30,182	)		391,451			818,422

88

Korea Development Bank

Notes to the Separate Financial Statements—(Continued)

For the years ended December 31, 2014 and 2013

(In millions of won)

	2013
	January 1, 2013			Increase (decrease)			Tax effect			December 31, 2013
Valuation gain on available-for-sale financial assets	W	558,937			(259,860	)		62,854			361,931
Exchange differences on translation of foreign operations		(37,385	)		(16,203	)		3,921			(49,667	)
Remeasurements of defined benefit liabilities		12,629			10,000			(2,420	)		20,209
	W	534,181			(266,063	)		64,355			332,473

(5) Retained earnings

The Korea Development Bank Act requires the Bank to appropriate at least 40% of net income as a legal reserve. This reserve can be transferred to paid-in capital or offset an accumulated deficit. In accordance with the Korea Development Bank Act, the Bank offsets an accumulated deficit with reserves. If the reserve is insufficient to offset the accumulated deficit, the Korean government is responsible for the deficit.

(i) Retained earnings as of December 31, 2014 and 2013 are as follows:

	December 31, 2014		December 31, 2013
Legal reserve	W	5,400,519		6,022,263
Voluntary reserve
Regulatory reserve for loan losses		1,306,925		1,306,925
Unappropriated retained earnings (accumulated deficits)		183,469		(621,744	)
	W	6,890,913		6,707,444

(ii) Changes in legal reserve for the years ended December 31, 2014 and 2013 are as follows:

	2014			2013
Beginning balance	W	6,022,263			5,641,363
Transfer from (contribution to) unappropriated retained earnings		(621,744	)		380,900
Ending balance	W	5,400,519			6,022,263

(iii) Changes in unappropriated retained earnings (accumulated deficits) for the years ended December 31, 2014 and 2013 are as follows:

	2014			2013
Beginning balance	W	(621,744	)		1,711,670
Profit (loss) for the year		183,469			(1,447,391	)
Transfer from (contribution to) legal reserve		621,744			(380,900	)
Contribution to regulatory reserve for loan losses		—			(271,976	)
Dividends		—			(233,147	)
Ending balance	W	183,469			(621,744	)

89

Korea Development Bank

Notes to the Separate Financial Statements—(Continued)

For the years ended December 31, 2014 and 2013

(In millions of won)

(iv) Statements of appropriation of retained earnings (disposal of deficits) for the years ended December 31, 2014 and 2013 are as follows:

	2014		2013
I. Unappropriated retained earnings (accumulated deficits):
Unappropriated retained earning carried forward from the prior year	W	—		825,647
Profit (loss) for the year		183,469		(1,447,391	)
		183,469		(621,744	)
II. Appropriation of retained earnings (disposal of deficits):
Legal reserve (transfer from legal reserve)		73,388		(621,744	)
Regulatory reserve for loan losses		63,903		—
Dividends
(Dividends per share W15 for 2014 and W0 for 2013)		46,178		—
		183,469		(621,744	)
III. Unappropriated retained earnings (accumulated deficits) to be carried over to subsequent year	W	—		—

(6) Regulatory reserve for loan losses

The Bank is required to provide a regulatory reserve for loan losses in accordance with Regulations on Supervision of Banking Business 29(1) and (2). The details of regulatory reserve for loan losses are as follows:

(i) Regulatory reserve for loan losses as of December 31, 2014 and 2013 are as follows:

	December 31, 2014		December 31, 2013
Beginning balance	W	1,306,925		1,306,925
Planned reserve for loan losses		63,903		—
Ending balance	W	1,370,828		1,306,925

(ii) Obligated amount of provision for regulatory reserve for loan losses and profit (loss) after adjusting regulatory reserve for loan losses for the years ended December 31, 2014 and 2013 are as follows:

	2014			2013
Profit (loss) for the year	W	183,469			(1,447,391	)
Obligated amount of provision for regulatory reserve for loan losses		(46,751	)		(17,152	)
Profit (loss) after adjusting regulatory reserve for loan losses	W	136,718			(1,464,543	)
Profit (loss) per share after adjusting regulatory reserve for loan losses (won)	W	73			(791	)

90

Korea Development Bank

Notes to the Separate Financial Statements—(Continued)

For the years ended December 31, 2014 and 2013

(In millions of won)

23. Net Interest Income

Net interest income for the years ended December 31, 2014 and 2013 are as follows:

	2014			2013
Interest income:
Due from banks	W	46,647			34,225
Financial assets held for trading		59,293			58,519
Available-for-sale financial assets		614,257			738,508
Held-to-maturity financial assets		629			3,144
Loans		4,029,615			3,932,156
		4,750,441			4,766,552
Interest expense:
Financial liabilities designated at fair value through profit or loss		(44,837	)		(45,267	)
Deposits		(894,555	)		(1,091,342	)
Borrowings		(273,205	)		(325,831	)
Bonds		(1,549,350	)		(1,573,647	)
		(2,761,947	)		(3,036,087	)
Net interest income	W	1,988,494			1,730,465

Interest received from impaired assets relating to loan receivables for the years ended December 31, 2014 and 2013 were W22,947 million and W40,628 million, respectively, and there was no interest received from impaired assets related to financial assets other than loans.

24. Net Fees and Commission Income

Net fees and commission income for the years ended December 31, 2014 and 2013 are as follows:

	2014			2013
Fees and commission income:
Loan commissions	W	190,133			189,704
Underwriting and investment consulting commissions		168,597			199,877
Brokerage and agency commissions		13,146			16,436
Trust and retirement pension plan commissions		28,510			29,799
Fees on asset management commissions		2,612			1,162
Other fees		64,993			59,088
		467,991			496,066
Fees and commission expenses:
Brokerage and agency fees		(8,702	)		(8,510	)
Other fees		(17,045	)		(33,822	)
		(25,747	)		(42,332	)
	W	442,244			453,734

91

Korea Development Bank

Notes to the Separate Financial Statements—(Continued)

For the years ended December 31, 2014 and 2013

(In millions of won)

25. Dividend Income

Dividend income for the years ended December 31, 2014 and 2013 are as follows:

	2014		2013
Financial assets held for trading	W	377		191
Available-for-sale financial assets		76,622		66,061
Investments in subsidiaries and associates		81,165		71,617
	W	158,164		137,869

26. Net Loss on Financial Assets Held for Trading

Net loss related to financial assets held for trading for the years ended December 31, 2014 and 2013 are as follows:

	2014			2013
Gains on financial assets held for trading:
Gains on sale	W	20,319			20,954
Gains on valuation		3,837			1,110
		24,156			22,064
Losses on financial assets held for trading:
Losses on sale		(26,442	)		(32,934	)
Losses on valuation		(3,741	)		(3,240	)
Purchase related expense		(297	)		(241	)
		(30,480	)		(36,415	)
	W	(6,324	)		(14,351	)

27. Net Gain (Loss) on Financial Liabilities Designated at Fair Value Through Profit or Loss

Net gain (loss) related to financial liabilities designated at fair value through profit or loss for the years ended December 31, 2014 and 2013 are as follows:

	2014			2013
Gains on financial liabilities designated at FVTPL:
Gains on redemption	W	469			2,606
Gains on valuation		2,789			44,021
		3,258			46,627
Losses on financial liabilities designated at FVTPL:
Losses on redemption		(42	)		(119	)
Losses on valuation		(75,881	)		(937	)
		(75,923	)		(1,056	)
	W	(72,665	)		45,571

92

Korea Development Bank

Notes to the Separate Financial Statements—(Continued)

For the years ended December 31, 2014 and 2013

(In millions of won)

28. Net Gain (Loss) on Available-for-sale Financial Assets

Net gain (loss) on available-for-sale financial assets for the years ended December 31, 2014 and 2013 are as follows:

	2014			2013
Gains on available-for-sale financial assets:
Gains on sale	W	416,182			446,280
Reversal of impairment losses		21,367			22,138
		437,549			468,418
Losses on available-for-sale financial assets:
Losses on sale		(32,961	)		(31,568	)
Impairment losses		(355,532	)		(637,701	)
		(388,493	)		(669,269	)
	W	49,056			(200,851)

29. Net Gain (Loss) on Derivatives

Net gain (loss) on derivatives for the years ended December 31, 2014 and 2013 are as follows:

	2014			2013
Net gain (loss) on trading purpose derivatives:
Gains on trading purpose derivatives:
Interest	W	2,701,958			1,858,925
Currency		4,680,371			4,703,321
Stock		2,136			6,013
Commodity		99,411			38,610
Embedded derivatives		21,261			22,260
Gains on adjustment of derivatives		6,222			6,158
		7,511,359			6,635,287
Losses on trading purpose derivatives:
Interest		(2,652,239	)		(1,972,484	)
Currency		(4,852,495	)		(4,575,970	)
Stock		(1,013	)		(4,713	)
Commodity		(99,225	)		(38,528	)
Embedded derivatives		(49,780	)		(13,529	)
Losses on adjustment of derivatives		(11,014	)		(8,444	)
		(7,665,766	)		(6,613,668	)
	W	(154,407	)		21,619

93

Korea Development Bank

Notes to the Separate Financial Statements—(Continued)

For the years ended December 31, 2014 and 2013

(In millions of won)

	2014			2013
Net loss on hedging purpose derivatives:
Gains on hedging purpose derivatives:
Interest	W	248,913			44,233
Currency		65,389			98,508
Gains on adjustment of derivatives		2,034			2,021
		316,336			144,762
Losses on hedging purpose derivatives:
Interest		(50,015	)		(228,126	)
Currency		(539,804	)		(296,768	)
Losses on adjustment of derivatives		(2,349	)		(2,174	)
		(592,168	)		(527,068	)
		(275,832	)		(382,306	)
Net gain (loss) on fair value hedged items:
Gains on fair value hedged items:
Gains on valuation		332,194			644,381
Gains on redemption		88,528			208,451
		420,722			852,832
Losses on fair value hedged items:
Losses on valuation		(260,306	)		(76,291	)
Losses on redemption		(49,795	)		(164,575	)
		(310,101	)		(240,866	)
		110,621			611,966
	W	(319,618	)		251,279

There is no ineffective portion of changes in the fair value of derivative designated as cash flow hedge recognized in profit or loss for the years ended December 31, 2014 and 2013.

30. Net Foreign Currency Transaction Gain (Loss)

Net foreign currency transaction gain (loss) for the years ended December 31, 2014 and 2013 are as follows:

	2014			2013
Net gain (loss) on foreign exchange transactions:
Gains on sales	W	716,348			813,930
Losses on sales		(604,495	)		(843,468	)
		111,853			(29,538	)
Net gain (loss) on foreign exchange translations:
Gains on foreign exchange translations		1,264,570			758,699
Losses on foreign exchange translations		(991,754	)		(982,042	)
		272,816			(223,343	)
	W	384,669			(252,881	)

94

Korea Development Bank

Notes to the Separate Financial Statements—(Continued)

For the years ended December 31, 2014 and 2013

(In millions of won)

31. Other Operating Income (Loss), net

Other operating income (loss) for the years ended December 31, 2014 and 2013 are as follows:

	2014			2013
Other operating income:
Gains on sale of loans	W	65,963			55,199
Reversal of other provisions		117			—
Gains on disposal of investments in subsidiaries and associates		5,671			6,268
Reversal of provisions		314,620			11,227
Others		6,431			7,918
		392,802			80,612
Other operating expenses:
Losses on sale of loans		(76,258	)		(203,485	)
Contribution to provision for other assets		(2,533	)		(2,535	)
Losses on disposal of investments in subsidiaries and associates		(832	)		(6,031	)
Provision for other allowances		(45,336	)		(461,859	)
Insurance expenses		(59,540	)		(62,140	)
Credit guarantee fund salary		(119,790	)		(105,181	)
Educational taxes		(36,384	)		(33,652	)
Foreign security contributions		(18,049	)		(19,584	)
Others		(19,852	)		(36,728	)
		(378,574	)		(931,195	)
	W	14,228			(850,583	)

95

Korea Development Bank

Notes to the Separate Financial Statements—(Continued)

For the years ended December 31, 2014 and 2013

(In millions of won)

32. General and Administrative Expenses

General and administrative expenses for the years ended December 31, 2014 and 2013 are as follows:

	2014		2013
Payroll costs:
Short-term employee benefits	W	271,293		262,650
Defined benefit costs		34,705		36,755
Defined contribution costs		472		273
Termination benefits		4,258		9,461
		310,728		309,139
Depreciation and amortization:
Depreciation of property and equipment		26,547		26,987
Amortization of intangible assets		24,671		19,347
		51,218		46,334
Other:
Employee welfare benefits		23,725		28,769
Rent expenses		24,165		24,057
Taxes and dues		18,696		17,011
Advertising expenses		17,859		18,220
Electronic data processing expenses		49,416		42,292
Fees and charges		24,285		23,048
Others		36,708		38,005
		194,854		191,402
	W	556,800		546,875

33. Non-Operating Income and Expense

Non-operating income and expense for the years ended December 31, 2014 and 2013 are as follows:

	2014			2013
Non-operating income:
Gain on disposal of property and equipment	W	8,494			817
Rental income on investment property		1,235			1,230
Others		4,087			5,906
		13,816			7,953
Non-operating expenses:
Loss on disposal of property and equipment		(87	)		(502	)
Depreciation of investment property		(1,559	)		(1,693	)
Impairment losses on intangible assets		(738	)		—
Donations		(7,868	)		(14,332	)
Others		(356	)		(1,195	)
		(10,608	)		(17,722	)
	W	3,208			(9,769	)

96

Korea Development Bank

Notes to the Separate Financial Statements—(Continued)

For the years ended December 31, 2014 and 2013

(In millions of won)

34. Income Tax Expense (Benefit)

(1) Income tax expenses (benefit) for the years ended December 31, 2014 and 2013 are as follows:

	2014			2013
Current income tax(*)	W	332,489			202,113
Changes in deferred income taxes on temporary differences		(268,965	)		(651,734	)
Deferred income tax recognized directly to equity		(30,182	)		(64,355	)
Changes in income taxes due to consolidated tax return		—			(1,918	)
Income tax expense (benefit)	W	33,342			(515,894	)

(*) Includes changes such as those that arise from final tax returns

(2) Profit (loss) before income taxes and income tax expense (benefit) for the years ended December 31, 2014 and 2013 are as follows:

	2014			2013
Profit (loss) before income taxes	W	216,811			(1,963,285	)
Income taxes calculated using enacted tax rates (24.2%)		52,468			(475,115	)
Adjustments:
Non-deductible losses and tax free gains		10,023			(16,871	)
Non-recognition effect of deferred income taxes		(2,428	)		32,015
Tax credit		(14,965	)		(20,926	)
Changes in income taxes due to consolidated tax return		—			(1,918	)
Net adjustments for prior year		(24,767	)		(34,210	)
Others		13,011			1,131
		(19,126	)		(40,779	)
Income tax expense (benefit)	W	33,342			(515,894	)
Effective tax rate		15.38	%		26.28	%

97

Korea Development Bank

Notes to the Separate Financial Statements—(Continued)

For the years ended December 31, 2014 and 2013

(In millions of won)

(3) Changes in temporary differences and deferred tax assets (liabilities) for the years ended December 31, 2014 and 2013 are as follows:

	2014
	January 1, 2014(*)			Decrease			Increase			December 31, 2014			Deferred tax assets (liabilities)
Derivative	W	(455,982	)		(455,982	)		(140,271	)		(140,271	)		(33,946	)
Investments in subsidiaries and associates		71,691			—			(12,170,522	)		(12,098,831	)		(2,777,795	)
Gains on fair value hedged items valuation		(233,536	)		(233,536	)		(483,771	)		(483,771	)		(117,073	)
Losses on foreign exchange translation for hedged liabilities		244,343			244,343			845,527			845,527			204,617
Impairment losses on investment bonds		413,928			105,239			45,000			353,689			85,593
Impairment losses on investment securities		1,326,779			92,727			407,052			1,641,104			397,147
Allowance for employee retirement benefits		173,188			9,150			15,953			179,991			43,548
Deposits for severance insurance		(178,119	)		(9,015	)		(733	)		(169,837	)		(41,101	)
Held-for-trading securities		1,786			2,125			(70,118	)		(70,457	)		(17,051	)
Available-for-sale bonds		(151,197	)		(380	)		—			(150,817	)		(36,498	)
Bad debt charge		711,947			117,193			1,321,636			1,916,390			463,766
Other provisions		447,494			549,692			322,983			220,785			53,430
Property impairment losses		7,667			173			—			7,494			1,814
Accrued dividends		226,174			213,771			—			12,403			3,002
Loan origination cost (fees)		(13,703	)		(13,703	)		52,551			52,551			12,717
Gains on sales of loans		(494,490	)		(18,551	)		3,135			(472,804	)		(114,418	)
Other		(173,256	)		132,277			(136,035	)		(441,568	)		(106,858	)
		1,924,714			735,523			(9,987,613	)		(8,798,422	)		(1,979,106	)
Temporary differences from unrecognized deferred tax assets and liabilities:
Investments in subsidiaries and associates		318,779			114,838			105,695			309,636			—
	W	2,243,493			850,361			(9,881,918	)		(8,488,786	)		(1,979,106	)

(*) Deferred income taxes as of January 1, 2014 reflected previous year’s additional tax adjustment after the financial statements were issued.

98

Korea Development Bank

Notes to the Separate Financial Statements—(Continued)

For the years ended December 31, 2014 and 2013

(In millions of won)

	2013
	January 1, 2013(*)			Decrease			Increase			December 31, 2013			Deferred tax assets (liabilities)
Derivative	W	(1,108,677	)		(1,108,677	)		(455,982	)		(455,982	)		(110,348	)
Investments in subsidiaries and associates		(663,003	)		10,124			1,095,391			422,264			102,188
Gains (losses) on fair value hedged items valuation		250,641			250,641			(233,536	)		(233,536	)		(56,516	)
Losses on foreign exchange translation for hedged liabilities		87,228			87,228			244,343			244,343			59,131
Impairment losses on investment bonds		404,652			68,710			140,729			476,671			115,354
Impairment losses on investment securities		880,156			51,106			496,922			1,325,972			320,885
Allowance for employee retirement benefits		157,276			10,630			26,991			173,637			42,020
Deposits for severance insurance		(146,153	)		(10,630	)		(32,486	)		(168,009	)		(40,658	)
Held-for-trading securities		(19,181	)		(19,177	)		2,126			2,122			513
Available-for-sale bonds		(257,601	)		(106,384	)		—			(151,217	)		(36,594	)
Bad debt charge		460,140			54,839			300,152			705,453			170,720
Other provisions		(13,055	)		89,143			540,085			437,887			105,969
Property impairment losses		7,840			173			—			7,667			1,856
Loan origination cost (fees)		(1,569	)		(1,569	)		(13,703	)		(13,703	)		(3,316	)
Gains on sales of loans		(437,953	)		(19,329	)		(74,668	)		(493,292	)		(119,377	)
Other		(423,843	)		(75,111	)		278,305			(70,427	)		(17,044	)
		(823,102	)		(718,283	)		2,314,669			2,209,850			534,783
Temporary differences from unrecognized deferred tax assets and liabilities:
Investments in subsidiaries and associates		199,152			12,889			132,516			318,779			—
	W	(623,950	)		(705,394	)		2,447,185			2,528,629			534,783

(*) Deferred income taxes as of January 1, 2013 reflected previous year’s additional tax adjustment after the financial statements were issued.

99

Korea Development Bank

Notes to the Separate Financial Statements—(Continued)

For the years ended December 31, 2014 and 2013

(In millions of won)

(4) Changes in deferred income taxes recognized directly to equity for the years ended December 31, 2014 and 2013 are as follows:

	2014
	December 31, 2014			Deferred tax assets (liabilities)			December 31, 2013			Deferred tax assets (liabilities)			Changes in deferred tax assets (liabilities)
Gains on valuation of available-for-sale financial assets	W	815,600			(260,384	)		361,931			(115,532	)		(144,852	)
Exchange differences on translation of foreign operations		(28,365	)		9,056			(49,667	)		15,856			(6,800	)
Losses on valuation of cash flow hedge		(13,866	)		4,427			—			—			4,427
Remeasurements of defined benefit liabilities		45,053			(14,384	)		20,209			(6,452	)		(7,932	)
	W	818,422			(261,285	)		332,473			(106,128	)		(155,157	)
	2013
	December 31, 2013			Deferred tax assets (liabilities)			December 31, 2012			Deferred tax assets (liabilities)			Changes in deferred tax assets (liabilities)
Gains on valuation of available-for-sale financial assets	W	361,931			(115,532	)		558,937			(178,386	)		62,854
Exchange differences on translation of foreign operations		(49,667	)		15,856			(37,385	)		11,935			3,921
Remeasurements of defined benefit liabilities		20,209			(6,452	)		12,629			(4,032	)		(2,420	)
	W	332,473			(106,128	)		534,181			(170,483	)		64,355

(5) A payment of W58,568 million was made by the Bank for income tax liabilities (which includes local tax) resulting from its 2014 annual tax audit by the Seoul Regional Tax Office. Of the payment amount, the amount of W55,802 million are temporary differences and therefore, is recognized as deferred tax assets.

35. Earnings (Loss) per Share

(1) Basic earnings (loss) per share

The Bank’s basic earnings (loss) per share for the years ended December 31, 2014 and 2013 are computed as follows:

(i) Basic earnings (loss) per share

	2014		2013
Profit (loss) attributable to ordinary shareholders of the Bank (A)	W	183,468,922,858		(1,447,391,046,665	)
Weighted-average number of ordinary shares outstanding (B)		1,859,056,365		1,850,454,427
Basic earnings (loss) per share (A/B)	W	99		(782	)

100

Korea Development Bank

Notes to the Separate Financial Statements—(Continued)

For the years ended December 31, 2014 and 2013

(In millions of won)

(ii) Weighted-average number of shares of ordinary shares outstanding

	2014
	Number of ordinary shares		Days		Cumulative shares
Number of ordinary shares outstanding (A)		1,852,372,235		364		674,263,493,540
Increased paid-in capital (B)		4,000,000		314		1,256,000,000
Retirement and issuance of shares (C)		3,036,079,768		1		3,036,079,768
Cumulative shares (D=A+B+C)						678,555,573,308
Weighted-average number of ordinary shares outstanding (D/365)						1,859,056,365
	2013
	Number of ordinary shares		Days		Cumulative shares
Number of ordinary shares outstanding (A)		1,850,372,235		365		675,385,865,775
Increased paid-in capital (B)		2,000,000		15		30,000,000
Cumulative shares (C=A+B)						675,415,865,775
Weighted-average number of ordinary shares outstanding (C/365)						1,850,454,427

(2) Diluted earnings (loss) per share

Diluted and basic earnings (loss) per share for the years ended December 31, 2014 and 2013 are equal because there is no potential dilutive instrument.

36. Pledged Assets

Assets pledged by the Bank as collateral as of December 31, 2014 and 2013 are as follows:

	December 31, 2014				December 31, 2013
	Pledged assets		Related liabilities		Pledged assets		Related liabilities
Available-for-sale financial assets(*)	W	8,703,923		5,586,234		8,482,074		3,950,854

(*) Pledged as collateral related to bonds sold under repurchase agreements and borrowings.

101

Korea Development Bank

Notes to the Separate Financial Statements—(Continued)

For the years ended December 31, 2014 and 2013

(In millions of won)

37. Guarantees and Commitments

Guarantees and commitments as of December 31, 2014 and 2013 are as follows:

	December 31, 2014		December 31, 2013
Confirmed acceptances and guarantees:
Acceptances in foreign currency	W	760,550		763,968
Guarantees for bond issuance		1,047,027		989,822
Guarantees for loans		1,075,100		566,581
Acceptances for foreign loans		1,056		2,087
Acceptances for letter of guarantee		48,285		42,374
Guarantee of on-lending debt		131,624		—
Others		5,223,067		5,214,558
		8,286,709		7,579,390
Unconfirmed acceptances and guarantees:
Letter of guarantee		2,036,364		2,846,366
Others		1,811,300		1,352,302
		3,847,664		4,198,668
Commitments:
Commitments on loans		4,970,077		5,965,549
Securities purchase agreement		2,020,595		20,709
Others		151,601		239,183
		7,142,273		6,225,441
	W	19,276,646		18,003,499

38. Day One Profit or Loss

Changes in deferred day one profit or loss for the years ended December 31, 2014 and 2013 are as follows:

	2014			2013
Beginning balance	W	(4,262	)		(5,999	)
New deferrals		1,370			(1,056	)
Recognized in current profit or loss		2,397			2,039
Others (end of transaction, etc.)		472			753
Ending balance	W	(23	)		(4,263	)

Deferred day one profit or loss arose from derivative financial instruments at level 3 on the fair value hierarchy.

102

Korea Development Bank

Notes to the Separate Financial Statements—(Continued)

For the years ended December 31, 2014 and 2013

(In millions of won)

39. Trust Accounts

(1) Trust accounts as of December 31, 2014 and 2013 are as follows:

	December 31, 2014		December 31, 2013
Accrued trust management fee	W	18,447		15,399
Deposits		1,720,217		1,592,582
Trust accounts payable		542,857		451,910
Accrued interest on deposits		14,757		20,367

(2) Transactions with trust accounts for the years ended December 31, 2014 and 2013 are as follows:

	2014			2013
Fees on trust accounts	W	27,190			28,688
Gains from trading of derivative instruments		2,060			1,808
Interest expenses on deposits		(45,343	)		(67,015	)
Interest expenses of trust accounts payable		(10,520	)		(10,323	)

(3) Principals guaranteed money trust and principals and interest guaranteed money trust

The carrying amounts of principals guaranteed money trust and principals and interest guaranteed money trust as of December 31, 2014 and 2013 are as follows:

	December 31, 2014		December 31, 2013
Principals guaranteed money trust	W	279,246		284,731
Principals and interest guaranteed money trust and non-guaranteed trust		216,052		208,201
	W	495,298		492,932
Principal of money trust	W	462,619		464,661
Income from trust deposits payable		32,679		28,271

103

Korea Development Bank

Notes to the Separate Financial Statements—(Continued)

For the years ended December 31, 2014 and 2013

40. Related Party Transactions

(1) The Bank’s related parties as of December 31, 2014 are as follows:

Classification	Corporate name
Subsidiaries	Daewoo Securities Co., Ltd., KDB Capital Corporation, KDB Asset Management Co., Ltd., Korea Infrastructure Investments Asset Management Co., Ltd, KDB Asia Ltd., KDB Ireland Ltd., KDB Bank Europe Ltd., Banco KDB Do Brazil S.A, KDB Bank Uzbekistan, Korea Infrastructure Fund and 4 others, KDB Value PEF VI, KDB Value PEF VII, KDB Sigma PEF, KDB Venture M&A PEF, KDB Consus Value PEF, KDB Turn Around PEF, Components and Materials M&A PEF and 2 others, KoFC-KDB Materials and Components Investment Fund No.1 and 2 others, Principals guaranteed trust accounts of KDB, Principals and interests guaranteed interest trust accounts of KDB, KDB SPC I and 4 others, KDB Win-win Together Support Special Asset Investment Trust 1 and 38 others,
Associates	Korea Electric Power Co., Ltd., Korea Aerospace Industries Co., Ltd., Korea Tourism Organization, Korea Appraisal Board, STX Offshore & Shipbuilding Co., Ltd, STX Heavy Industries Co., Ltd, STX Corporation, Korea Marine Guarantee Insurance, Daewoo Shipbuilding & Marine Engineering Co., Ltd., GM Korea Company and 113 others, Job Creating Small and Medium Enterprises Investments private equity fund and 51 others , KoFC- KIS Pioneer Champ 2010-1 venture investment fund and 1 other, KoFC-Bokwang Pioneer Champ 2010-3 investment fund and 36 others, NPS 06-2 Neoplux Corporate Restructuring Company and 12 others, KoFC- KB Man Foundation Investment Fund and 15 others.
Others	Key management personnel

104

Korea Development Bank

Notes to the Separate Financial Statements—(Continued)

For the years ended December 31, 2014 and 2013

(In millions of won)

(2) Significant balances with related parties as of December 31, 2014 and 2013 are as follows:

	Account	December 31, 2014			December 31, 2013
Subsidiaries:
Daewoo Securities Co., Ltd.	Derivative financial assets	W	118,964			53,058
	Other assets		5,089			5,089
	Deposits		35,711			5,530
	Bonds		790,584			380,069
	Derivative financial liabilities		96,481			44,658
	Other liabilities		4,434			4,185
KDB Capital Corporation	Derivative financial assets		5,030			329
	Deposits		25,295			11,248
	Derivative financial liabilities		1,276			9,771
	Other liabilities		484			535
KDB Asset Management Co., Ltd.	Deposits		282			41
KDB Infrastructure Investments Asset Management Co., Ltd.	Deposits		2,660			2,254
KDB Ireland Ltd.	Loans		268,111			268,326
	Allowance for loan losses		(87	)		(93	)
	Derivative financial assets		5,122			7,112
	Other assets		393			613
	Deposits		—			1,055
	Bonds		—			36,075
	Derivative financial liabilities		222			352
KDB Bank Europe Ltd.	Cash and due from banks		321,476			286,340
	Loans		10,992			79,148
	Allowance for loan losses		(11	)		(87	)
	Derivative financial assets		5,196			4,109
	Other assets		1,009			751
	Derivative financial liabilities		256			414
Banco KDB Do Brazil S.A.	Loans		54,960			183,220
	Allowance for loan losses		(18	)		(59	)
	Other assets		—			3,554
	Allowance of other assets		—			(1	)
KDB Asia Ltd.	Cash and due from banks		181,873			188,250
	Loans		65,952			184,765
	Allowance for loan losses		(7	)		(23	)
	Derivative financial assets		1,443			2,694
	Other assets		210			547
	Deposits		2			2
	Borrowings		19,786			9,396
	Bonds		—			126,282
	Derivative financial liabilities		35			67

105

Korea Development Bank

Notes to the Separate Financial Statements—(Continued)

For the years ended December 31, 2014 and 2013

(In millions of won)

	Account	December 31, 2014			December 31, 2013
KDB Value PEF VI	Securities	W	50,428			70,068
	Loans		1,357,986			1,294,365
	Allowance for loan losses		(3,208	)		(944	)
	Derivative financial assets		17,994			2,670
	Other assets		28,248			35,177
	Allowance of other assets		(58	)		(22	)
	Deposits		86,851			69,504
	Borrowings		7,057			6,890
	Bonds		—			50,000
	Derivative financial liabilities		27,889			2,670
	Other liabilities		1,680			3,644
	Other provisions		1			—
Others	Securities		354,946			341,217
	Loans		122,205			81,529
	Allowance for loan losses		(1,794	)		(185	)
	Derivative financial assets		10,644			228
	Other assets		5,904			6,433
	Allowance of other assets		—			(2	)
	Deposits		19,943			78,890
	Borrowings		—			10,589
	Bonds		—			40,000
	Derivative financial liabilities		253			5,157
	Other liabilities		2,625			3,076
Associates:
Daewoo Shipbuilding & Marine Engineering Co., Ltd.	Loans		1,934,985			1,365,249
	Allowance for loan losses		(1,465	)		(1,550	)
	Other assets		476			3,259
	Deposits		14,194			204,097
	Derivative financial liabilities		36,876			145,638
	Other liabilities		40,340			363
Korea Electric Power Co., Ltd.	Loans		59,778			2,360,709
	Derivative financial assets		4,723			—
	Securities		1,513,541			5,412
	Other assets		4,837			7,586
	Borrowings		7,442			—
	Derivative financial liabilities		2,737			—
	Other liabilities		1			—
Korea Aerospace Industries Co., Ltd.	Securities		50,749			50,000
	Loans		104,484			127,235
	Other assets		201			1,346
	Deposits		1,924			76,095
	Other liabilities		159			106

106

Korea Development Bank

Notes to the Separate Financial Statements—(Continued)

For the years ended December 31, 2014 and 2013

(In millions of won)

	Account	December 31, 2014		December 31, 2013
Others	Securities		52,770		60,779
	Loans		3,216,393		3,036,299
	Derivative financial assets		34,906		20,212
	Other assets		38		191
	Deposits		542,548		197,844
	Borrowings		—		1,000
Others	Derivative financial liabilities		50,028		126,512
	Other liabilities		329,520		396
		W	12,114,984		11,789,308

(3) Significant transactions with related parties for the years ended December 31, 2014 and 2013 are as follows:

	Account	2014			2013
Subsidiaries:
Daewoo Securities Co., Ltd.	Interest income	W	261			—
	Fees and commission income, other income		174,254			4,902
	Interest expenses		(20,576	)		(10,306	)
	Other operating expenses		(157,796	)		(20,910	)
KDB Capital Corporation	Fees and commission income, other income		11,747			1,560
	Interest expenses		(37	)		(114	)
	Other operating expenses		(8,826	)		(10,160	)
KDB Asset Management Co., Ltd.	Fees and commission income, other income		—			20
	Interest expenses		(1	)		(3	)
	Other operating expenses		(29	)		—
KDB Infrastructure Investments Asset Management Co., Ltd	Interest expenses		(36	)		(106	)
KDB Ireland Ltd.	Interest income		2,163			3,192
	Reversal of allowance for loan losses		40			90
	Fees and commission income, other income		149			1
	Interest expenses		—			—
	Provision for loan losses		(19	)		(5	)

107

Korea Development Bank

Notes to the Separate Financial Statements—(Continued)

For the years ended December 31, 2014 and 2013

(In millions of won)

	Account	2014			2013
	Other operating expenses	W	(2,241	)		(12	)
KDB Bank Europe Ltd.	Interest income		4,536			4,436
	Reversal of allowance for loan losses		158			514
	Fees and commission income, other income		5,733			8,691
	Interest expenses		—			(60	)
	Provision for loan losses		(51	)		(150	)
	Other operating expenses		(2,263	)		(3,364	)
Banco KDB Do Brazil S.A.	Interest income		2,470			11,371
	Reversal of allowance for loan losses		45			34
	Fees and commission income, other income		2			9
	Provision for loan losses		—			(41	)
	Other operating expenses		4			(70	)
KDB Asia Ltd.	Interest income		1,927			3,751
	Reversal of allowance for loan losses		100			92
	Fees and commission income, other income		1,376			1,378
	Interest expenses		(4	)		(5	)
	Provision for loan losses		(87	)		(79	)
	Other operating expenses		(1,793	)		(1,706	)
KDB Value PEF VI	Interest income		58,313			1,071
	Fees and commission income, other income		26,423			37,987
	Interest expenses		(791	)		(1,071	)
	Other operating expenses		(34,856	)		(4,103	)
Others	Interest income		10,686			72,252
	Reversal of allowance for loan losses		15,970			129
	Fees and commission income, other income		25,395			47,012
	Interest expenses		(895	)		(669	)
	Provision for loan losses		(7,604	)		(236	)
	Other operating expenses		(2,410	)		(7,625	)
Associates:
Daewoo Shipbuilding & Marine Engineering Co., Ltd.	Interest income		45,516			46,815
	Other operating incomes		117,274			22,997
	Interest expense		(1,079	)		(1,650	)
	Other operating expenses		(28,316	)		(82,692	)

108

Korea Development Bank

Notes to the Separate Financial Statements—(Continued)

For the years ended December 31, 2014 and 2013

(In millions of won)

	Account	2014			2013
Korea Electric Power Co., Ltd.	Interest income	W	60,607			71,826
	Other operating incomes		4,683			—
	Other operating expenses		(2,746	)		—
Korea Aerospace Industries Co., Ltd.	Interest income		4,391			8,017
	Other operating incomes		462			13
	Interest expense		(274	)		(826	)
	Other operating expenses		(164	)		(1	)
Others	Interest income		103,687			136,999
	Fees and commission income, other income		255,506			411,777
	Interest expenses		(3,152	)		(3,560	)
	Other operating expenses		(810,608	)		(783,731	)
		W	(152,776	)		(36,319	)

(4) Details of guarantees and commitments to the related parties as of December 31, 2014 and 2013 are as follows:

	Account	2014		2013
Subsidiaries:
KDB Value VI PEF	Confirmed acceptances and guarantees	W	181,119		66,000
Others	Loan commitments		523,900		546,300
Associates:
Daewoo Shipbuilding & Marine Engineering Co., Ltd.	Confirmed acceptances and guarantees		266,470		729,560
	Unconfirmed acceptances and guarantees		409,321		134,992
Korea Electric Power Co., Ltd.	Confirmed acceptances and guarantees		198,684		193,964
Korea Aerospace Industries Co., Ltd.	Confirmed acceptances and guarantees		297,474		106,838
Others	Confirmed acceptances and guarantees		1,177,610		868,404
	Unconfirmed acceptances and guarantees		715,541		804,305
	Loan commitments		19,200		—
		W	3,789,319		3,450,363

109

Korea Development Bank

Notes to the Separate Financial Statements—(Continued)

For the years ended December 31, 2014 and 2013

(In millions of won)

(5) Details of compensation to key management personnel for the years ended December 31, 2014 and 2013 are as follows:

	2014			2013
Short-term employee benefits	W	(4,853	)		(16,438	)
Post-employment benefits		(802	)		(1,459	)
Share-based Payment		(29	)		—
	W	(5,684	)		(17,897	)

(6) Details of assets pledged as collaterals to the related parties as of December 31, 2014 and 2013 are as follows:

	December 31, 2014
	Carrying amounts		Amounts collateralized		Secured party
Available-for-sale debt securities	W	16,155		16,000	Daewoo Securities Co., Ltd.

	December 31, 2013
	Carrying amounts		Amounts collateralized		Secured party
Available-for-sale debt securities	W	16,064		16,000	Daewoo Securities Co., Ltd.

(7) Details of assets pledged as collaterals from the related parties as of December 31, 2014 and 2013 are as follows:

	December 31, 2014
	Carrying amounts		Amounts collateralized		Secured party
Securities denominated in foreign currencies	W	49,333		57,783	KDB Ireland Ltd.

	December 31, 2013
	Carrying amounts		Amounts collateralized		Secured party
Securities denominated in foreign currencies	W	55,637		61,207	KDB Ireland Ltd.

110

Korea Development Bank

Notes to the Separate Financial Statements—(Continued)

For the years ended December 31, 2014 and 2013

(In millions of won)

41. Statements of Cash Flows

(1) Cash and cash equivalents in the statements of cash flows as of December 31, 2014 and 2013 are as follows:

	December 31, 2014			December 31, 2013
Cash and due from banks:
Cash and foreign currencies	W	93,801			153,965
Due from banks denominated in Korean won		1,231,849			1,974,114
Due from banks denominated in foreign currencies		4,648,999			3,582,359
		5,974,649			5,710,438
Less: Restricted due from banks, others		(2,237,986	)		(2,850,446	)
Add: Financial instruments reaching maturity within three months from date of acquisition
Financial assets held for trading:
Government and public bonds		50,224			90,360
Loans:
Call-loans		4,933,613			3,980,568
Inter-bank loans		299,414			229,044
		5,233,027			4,209,612
		5,283,251			4,299,972
Cash and cash equivalents	W	9,019,914			7,159,964

(2) Significant transactions not involving cash flows for the years ended December 31, 2014 and 2013 are as follows:

	2014			2013
Decrease in loans due to write-offs	W	(357,498	)		(336,530	)
Increase in available-for-sale financial assets due to debt-to-equity swap		108,653			179,596
Increase (decrease) in accumulated other comprehensive income due to securities valuation		64,363			(259,860	)
Deferred income tax effect due to securities valuation		(15,586	)		62,854
Reclassification of available-for-sale financial assets to investments in subsidiaries and associates		26,823			9,141
Reclassification of investments in subsidiaries and associates to available-for-sale financial assets		8,860			6,108
Transfer from investment property to property and equipment		22,561			10,098
Consideration for merger with controlling entities		5,898,538			—

111

Korea Development Bank

Notes to the Separate Financial Statements—(Continued)

For the years ended December 31, 2014 and 2013

(In millions of won)

42. Transfers of Financial Instruments

Details of financial assets and liabilities related to repurchase agreements sold and loaned debt securities that do not qualify for derecognition as of December 31, 2014 and 2013 are as follows:

	December 31, 2014				December 31, 2013
Characteristics of transactions	Carrying amounts for transferred assets		Carrying amounts for related liabilities		Carrying amounts for transferred assets		Carrying amounts for related liabilities
Repurchase agreements sold	W	2,857,455		1,860,444		6,590,367		4,124,630
Loaned debt securities		10,205		—		59,528		—
	W	2,867,660		1,860,444		6,649,895		4,124,630

43. Fair Value of Financial Assets and Liabilities

The Bank classifies and discloses fair value of the financial instruments into the following three-level hierarchy:

• Level 1: Financial instruments measured at quoted prices from active markets are classified as fair value level 1.

• Level 2: Financial instruments measured using valuation techniques where all significant inputs are observable market data are classified as level 2.

• Level 3: Financial instruments measured using valuation techniques where one or more significant inputs are not based on observable market data are classified as level 3.

(1) Fair value hierarchy of financial instruments measured at fair value

(i) The fair value hierarchy of financial instruments measured at fair value as of December 31, 2014 and 2013 are as follows:

	December 31, 2014
	Level 1		Level 2		Level 3		Total
Financial assets:
Financial assets held for trading	W	930,333		488,065		—		1,418,398
Available-for-sale financial assets		1,926,084		26,978,409		9,255,532		38,160,025
Derivative financial assets		3		4,842,756		70,033		4,912,792
	W	2,856,420		32,309,230		9,325,565		44,491,215
Financial liabilities:
Financial liabilities designated at FVTPL	W	—		1,133,670		4,958		1,138,628
Derivative financial liabilities		5		4,744,243		44,906		4,789,154
	W	5		5,877,913		49,864		5,927,782

112

Korea Development Bank

Notes to the Separate Financial Statements—(Continued)

For the years ended December 31, 2014 and 2013

(In millions of won)

	December 31, 2013
	Level 1		Level 2		Level 3		Total
Financial assets:
Financial assets held for trading	W	1,083,683		341,970		—		1,425,653
Available-for-sale financial assets		1,991,068		21,694,312		1,848,853		25,534,233
Derivative financial assets		5		4,235,278		83,989		4,319,272
	W	3,074,756		26,271,560		1,932,842		31,279,158
Financial liabilities:
Financial liabilities designated at FVTPL	W	—		668,627		9,289		677,916
Derivative financial liabilities		—		3,856,378		23,723		3,880,101
	W	—		4,525,005		33,012		4,558,017

(ii) Changes in the fair value of level 3 financial instruments for the years ended December 31, 2014 and 2013 are as follows:

	2014
	January 1, 2014		Profit or loss			Other comprehensive income			Acquisition/ Issue		Sale/ Settlement			Acquisition of parent company		December 31, 2014
Financial assets:
Available-for-sale financial assets	W	1,848,853		(46,844	)		(143,983	)		709,556		(137,867	)		7,025,817		9,255,532
Derivative financial assets		83,989		(50,893	)		—			78,806		(41,869	)		—		70,033
	W	1,932,842		(97,737	)		(143,983	)		788,362		(179,736	)		7,025,817		9,325,565
Financial liabilities:
Financial liabilities designated at FVTPL	W	9,289		(2,379	)		—			1,293		(3,245	)		—		4,958
Derivative financial liabilities		23,723		(73,592	)		—			105,180		(10,405	)		—		44,906
	W	33,012		(75,971	)		—			106,473		(13,650	)		—		49,864

113

Korea Development Bank

Notes to the Separate Financial Statements—(Continued)

For the years ended December 31, 2014 and 2013

(In millions of won)

	2013
	January 1, 2013		Profit or loss			Other comprehensive income			Acquisition/ Issue		Sale/ Settlement			Adjustments in level(*)			December 31, 2013
Financial assets:
Available-for-sale financial assets	W	1,852,733		(71,448	)		(108,695	)		1,090,757		(364,341	)		(550,153	)		1,848,853
Derivative financial assets		149,556		1,138			—			37,920		(104,625	)		—			83,989
	W	2,002,289		(70,310	)		(108,695	)		1,128,677		(468,966	)		(550,153	)		1,932,842
Financial liabilities:
Financial liabilities designated at FVTPL	W	10,770		230			—			5,788		(7,499	)		—			9,289
Derivative financial liabilities		34,494		(9,593	)		—			7,942		(9,120	)		—			23,723
	W	45,264		(9,363	)		—			13,730		(16,619	)		—			33,012

(*) Upon adoption of K-IFRS No. 1113 ‘Fair Value Measurement’ during the year ended December 31, 2013, available-for-sale financial assets with restrictions on disposals of publicly traded stocks are measured by quoted prices in active markets, since the restrictions are applicable to characteristics of the entity’s holding, and therefore transfer levels occur.

(iii) Details of valuation technique and inputs used in the fair value measurement categorized within level 2 of the fair value hierarchy of financial instruments measured at fair value as of December 31, 2014 and 2013 are as follows:

	Valuation technique	Input
Financial assets held for trading:
Equity securities	Net asset value approach	Underlying asset price
Debt securities	Discounted cash flow method	Discount rate
Available-for-sale financial assets:
Equity securities	Net asset value approach	Underlying asset price
Debt securities	Discounted cash flow method	Discount rate
Derivatives financial assets:
Interest rate swaps	Discounted cash flow method,	Discount rate,
Currency forwards, swaps	Black-Scholes model,	Volatility,
Currency options	Modified Black model,	Exchange rate,
Commodities options	Formula model	Commodity index
Financial liabilities designated at FVTPL:
Bonds	Discounted cash flow method	Discount rate

114

Korea Development Bank

Notes to the Separate Financial Statements—(Continued)

For the years ended December 31, 2014 and 2013

(In millions of won)

(iv) Details of valuation technique and quantitative information about unobservable inputs used in the fair value measurement categorized within level 3 of the fair value hierarchy of financial instruments measured at fair value as of December 31, 2014 and 2013 are as follows:

	December 31, 2014
	Valuation technique	Unobservable input	Range (%)
Available-for-sale financial assets:
Equity securities	Discounted cash flow	Discount rate	4.48 ~ 19.40
	method,	Growth rate	0.00
	Risk- adjusted discount	Rate of increase in
	rate method,	liquidation value	0.00
	Relative value approach	Discount rate of
		rent cash flow Rate of increase in property disposal price	8.01 2.00
Derivatives financial assets:
Interest rate swaps	Discounted cash flow	Volatility	12.50 ~ 21.20
	method	Correlation coefficient	(-)0.63 ~ 0.94
Interest rate options	Modified Black model	Volatility	12.50 ~ 21.20
Stock index options	Black-Scholes model	Volatility	19.00 ~ 57.00
Equity options	Finite difference	Volatility	19.00 ~ 57.00
	method	Correlation coefficient	0.1 ~ 0.48
Financial liabilities designated at FVTPL:
Borrowings	Finite difference	Volatility	19.00 ~ 57.00
	method	Correlation coefficient	0.1 ~ 0.48

	December 31, 2013
	Valuation technique	Unobservable input	Range (%)
Available-for-sale financial assets:
Equity securities	Discounted cash flow	Discount rate	5.05 ~ 27.10
	method,	Growth rate	0.00
	Risk- adjusted discount	Rate of increase in
	rate method,	liquidation value	0.00
	Relative value approach	Discount rate of rent cash flow	8.01
		Rate of increase in property disposal price	0.92
Derivatives financial assets:
Interest rate swaps	Discounted cash flow	Volatility	9.50 ~ 16.00
	method	Correlation coefficient	(-)0.90 ~ 0.99
Interest rate options	Modified Black model	Volatility	9.50 ~ 16.00
Stock index options	Black-Scholes model	Volatility	15.40 ~ 57.00
Equity options	Finite difference	Volatility	15.40 ~ 57.00
	method	Correlation coefficient	0.001 ~ 0.49
Financial liabilities designated at FVTPL:
Borrowings	Finite difference	Volatility	15.40 ~ 57.00
	method	Correlation coefficient	0.001 ~ 0.49

115

Korea Development Bank

Notes to the Separate Financial Statements—(Continued)

For the years ended December 31, 2014 and 2013

(In millions of won)

(v) The sensitivity analysis on changes in unobservable inputs for financial instruments categorized within level 3 of the fair value hierarchy of financial instruments measured at fair value as of December 31, 2014 and 2013 is as follows:

	December 31, 2014
	Profit(loss) for the year					Comprehensive income(loss)
	Favorable change		Unfavorable change			Favorable change		Unfavorable change
Available-for-sale financial assets(*1)	W	—		—			1,640,978		(389,774	)
Derivatives financial instruments(*2)		10,786		(10,968	)		—		—
Financial liabilities designated at FVTPL(*2)		71		(76	)		—		—
	W	10,857		(11,044	)		1,640,978		(389,774	)

	December 31, 2013
	Profit(loss) for the year					Comprehensive income(loss)
	Favorable change		Unfavorable change			Favorable change		Unfavorable change
Available-for-sale financial assets(*1)	W	—		—			127,054		(64,840	)
Derivatives financial instruments(*2)		8,471		(7,551	)		—		—
Financial liabilities designated at FVTPL(*2)		136		(132	)		—		—
	W	8,607		(7,683	)		127,054		(64,840	)

(*1) Sensitivity amounts of equity securities are calculated by increasing and decreasing the correlations between the discount rates(-1~1%) and the growth rates(0~1%) or the rate of increase in liquidation value(-1~1%) which are significant unobservable inputs. Sensitivity amounts for beneficiary certificates are calculated by increasing and decreasing the correlations between the discount rate of rent cash flow(-1~1%) and the rate of increase in property disposal price(-1~1%), only when it is consists of real property. Other than that, it is difficult to measure the sensitivity amounts of beneficiary certificates for practical reasons.

(*2) Sensitivity amounts of derivatives financial instruments and financial liabilities designated at FVTPL are calculated by increasing and decreasing the correlation coefficient and volatility(-10~10%) which are significant unobservable inputs.

116

Korea Development Bank

Notes to the Separate Financial Statements—(Continued)

For the years ended December 31, 2014 and 2013

(In millions of won)

(2) Fair value hierarchy of financial instruments disclosed by fair value

(i) The fair value hierarchy of financial instruments disclosed by fair value as of December 31, 2014 and 2013 are as follows:

	December 31, 2014
	Level 1		Level 2		Level 3		Total
Financial assets:
Cash and due from banks(*)	W	3,736,663		2,237,880		—		5,974,543
Loans(*)		—		4,933,613		131,592,753		136,526,366
Held-to-maturity financial assets		6,850		11,339		—		18,189
Other financial assets(*)		—		3,215,399		2,207,563		5,422,962
	W	3,743,513		10,398,231		133,800,316		147,942,060
Financial liabilities:
Deposits(*)	W	—		1,041,922		36,615,629		37,657,551
Borrowings(*)		—		2,085,951		21,531,411		23,617,362
Bonds		—		118,703,326		—		118,703,326
Other financial liabilities(*)		—		3,072,936		2,847,833		5,920,769
	W	—		124,904,135		60,994,873		185,899,008

	December 31, 2013
	Level 1		Level 2		Level 3		Total
Financial assets:
Cash and due from banks(*)	W	2,859,992		2,850,345		—		5,710,337
Loans(*)		—		4,224,342		93,392,378		97,616,720
Held-to-maturity financial assets		7,703		20,200		—		27,903
Other financial assets(*)		—		3,488,431		656,296		4,144,727
	W	2,867,695		10,583,318		94,048,674		107,499,687
Financial liabilities:
Deposits(*)	W	—		2,223,052		35,520,796		37,743,848
Borrowings(*)		—		1,560,347		21,695,966		23,256,313
Bonds		—		56,732,246		—		56,732,246
Other financial liabilities(*)		—		2,921,458		2,061,068		4,982,526
	W	—		63,437,103		59,277,830		122,714,933

(*) For financial instruments categorized as level 2, the carrying amount is considered a reasonable approximation of the fair value and is thus, disclosed as the fair value.

117

Korea Development Bank

Notes to the Separate Financial Statements—(Continued)

For the years ended December 31, 2014 and 2013

(In millions of won)

(ii) Details of valuation technique and inputs used in the fair value measurement categorized within level 2 and 3 of the fair value hierarchy of financial instruments disclosed by fair value as of December 31, 2014 and 2013 are as follows:

	December 31, 2014
	Valuation technique	Input
Level 2
Financial assets:
Held-to-maturity financial assets	Discounted cash flow method	Discount rate
Financial liabilities:
Bonds	Discounted cash flow method	Discount rate
Level 3
Financial assets:
Loans	Discounted cash flow method	Credit spread, Other spread, Prepayment rate
Other financial assets	Discounted cash flow method	Other spread
Financial liabilities:
Deposits	Discounted cash flow method	Other spread, Prepayment rate
Borrowings	Discounted cash flow method	Other spread
Other financial liabilities	Discounted cash flow method	Other spread

	December 31, 2013
	Valuation technique	Input
Level 2
Financial assets:
Held-to-maturity financial assets	Discounted cash flow method	Discount rate
Financial liabilities:
Bonds	Discounted cash flow method	Discount rate
Level 3
Financial assets:
Loans	Discounted cash flow method	Credit spread, Other spread,
		Prepayment rate
Other financial assets	Discounted cash flow method	Other spread
Financial liabilities:
Deposits	Discounted cash flow method	Other spread
Borrowings	Discounted cash flow method	Other spread
Other financial liabilities	Discounted cash flow method	Other spread

118

Korea Development Bank

Notes to the Separate Financial Statements—(Continued)

For the years ended December 31, 2014 and 2013

(In millions of won)

44. Categories of Financial Assets and Liabilities

Categories of financial assets and liabilities as of December 31, 2014 and 2013 are as follows:

	December 31, 2014
	Cash and cash equivalents		Financial instruments held for trading		Financial instruments designated at FVTPL		Available- for-sale financial instruments		Held-to- maturity financial instruments		Loan and receivables		Financial liabilities measured at amortized cost		Hedging purpose derivatives instruments		Total
Financial assets:
Cash and due from banks	W	3,736,663		—		—		—		—		2,237,880		—		—		5,974,543
Financial assets held for trading		50,224		1,368,174		—		—		—		—		—		—		1,418,398
Available-for-sale financial assets		—		—		—		38,160,025		—		—		—		—		38,160,025
Held-to-maturity financial assets		—		—		—		—		17,238		—		—		—		17,238
Loans		5,233,027		—		—		—		—		129,081,439		—		—		134,314,466
Derivative financial assets		—		4,050,185		—		—		—		—		—		862,607		4,912,792
Other financial assets		—		—		—		—		—		5,421,457		—		—		5,421,457
	W	9,019,914		5,418,359		—		38,160,025		17,238		136,740,776		—		862,607		190,218,919
Financial liabilities:
Financial liabilities designated at FVTPL	W	—		—		1,138,628		—		—		—		—		—		1,138,628
Deposits		—		—		—		—		—		—		37,605,714		—		37,605,714
Borrowings		—		—		—		—		—		—		23,537,531		—		23,537,531
Bonds		—		—		—		—		—		—		116,569,796		—		116,569,796
Derivative financial liabilities		—		3,884,084		—		—		—		—		—		905,070		4,789,154
Other financial liabilities		—		—		—		—		—		—		5,920,686		—		5,920,686
	W	—		3,884,084		1,138,628		—		—		—		183,633,727		905,070		189,561,509

119

Korea Development Bank

Notes to the Separate Financial Statements—(Continued)

For the years ended December 31, 2014 and 2013

(In millions of won)

	December 31, 2013
	Cash and cash equivalents		Financial instruments held for trading		Financial instruments designated at FVTPL		Available- for-sale financial instruments		Held-to- maturity financial instruments		Loan and receivables		Financial liabilities measured at amortized cost		Hedging purpose derivatives instruments		Total
Financial assets:
Cash and due from banks	W	2,859,992		—		—		—		—		2,850,345		—		—		5,710,337
Financial assets held for trading		90,360		1,335,293		—		—		—		—		—		—		1,425,653
Available-for-sale financial assets		—		—		—		25,534,233		—		—		—		—		25,534,233
Held-to-maturity financial assets		—		—		—		—		27,109		—		—		—		27,109
Loans		4,209,612		—		—		—		—		92,098,801		—		—		96,308,413
Derivative financial assets		—		3,688,950		—		—		—		—		—		630,322		4,319,272
Other financial assets		—		—		—		—		—		4,139,475		—		—		4,139,475
	W	7,159,964		5,024,243		—		25,534,233		27,109		99,088,621		—		630,322		137,464,492
Financial liabilities:
Financial liabilities designated at FVTPL	W	—		—		677,916		—		—		—		—		—		677,916
Deposits		—		—		—		—		—		—		37,727,270		—		37,727,270
Borrowings		—		—		—		—		—		—		23,220,773		—		23,220,773
Bonds		—		—		—		—		—		—		55,924,868		—		55,924,868
Derivative financial liabilities		—		3,523,367		—		—		—		—		—		356,734		3,880,101
Other financial liabilities		—		—		—		—		—		—		4,982,513		—		4,982,513
	W	—		3,523,367		677,916		—		—		—		121,855,424		356,734		126,413,441

120

Korea Development Bank

Notes to the Separate Financial Statements—(Continued)

For the years ended December 31, 2014 and 2013

(In millions of won)

45. Offsetting of Financial Assets and Liabilities

Details of financial instruments subject to offsetting, enforceable master netting agreements or similar agreements as of December 31, 2014 and 2013 are as follows:

	December 31, 2014
	Gross amounts of recognized financial asset		Gross amounts of recognized financial liabilities set off in the statement of financial position		Net amounts of financial assets presented in the statement of financial position		Related amounts not set off in the statement of financial position				Net amount
							Financial instruments		Cash collateral received
Derivative financial assets(*)	W	4,912,792		—		4,912,792		3,411,752		41,758		1,459,282
Receivable spot exchange(*)		2,611,319		—		2,611,319		2,575,345		—		35,974
Unsettled domestic exchange receivables		1,723,326		1,119,246		604,080		—		—		604,080
Security deposits for repurchase agreements sold 2,857,455				—		2,857,455		1,860,444		—		997,011
Repurchase agreements bought		299,451		—		299,451		299,451		—		—
Loaned debt securities		10,205		—		10,205		10,205		—		—
Receivables from securities transaction		13,046		—		13,046		13,046		—		—
	W	12,427,594		1,119,246		11,308,348		8,170,243		41,758		3,096,347

	December 31, 2014
	Gross amounts of recognized financial liabilities		Gross amounts of recognized financial assets set off in the statement of financial position		Net amounts of financial liabilities presented in  the statement of financial position		Related amounts not set off in the statement of financial position				Net amount
							Financial instruments		Cash collateral received
Derivative financial liabilities(*)	W	4,789,154		—		4,789,154		3,628,140		—		1,161,014
Outstanding spot exchange(*)		2,610,986		—		2,610,986		2,575,345		—		35,641
Unsettled domestic exchange payables		1,581,196		1,119,246		461,950		—		—		461,950
Repurchase agreements sold		1,860,444		—		1,860,444		1,860,444		—		—
Payables from securities transaction		566		—		566		566		—		—
	W	10,842,346		1,119,246		9,723,100		8,064,495		—		1,658,605

121

Korea Development Bank

Notes to the Separate Financial Statements—(Continued)

For the years ended December 31, 2014 and 2013

(In millions of won)

	December 31, 2013
	Gross amounts of recognized financial asset		Gross amounts of recognized financial liabilities set off in the statement of financial position		Net amounts of financial assets presented in the statement of financial position		Related amounts not set off in the statement of financial position				Net amount
							Financial instruments		Cash collateral received
Derivative financial assets(*)	W	4,319,272		—		4,319,272		2,796,848		67,846		1,454,578
Receivable spot exchange(*)		2,636,758		—		2,636,758		2,629,396		—		7,362
Domestic exchange receivables		1,839,647		987,974		851,673		—		—		851,673
Security deposits for repurchase agreements sold		6,590,367		—		6,590,367		4,124,630		—		2,465,737
Repurchase agreements bought		255,637		—		255,637		255,637		—		—
Loaned debt securities		59,527		—		59,527		59,527		—		—
Receivables from securities transaction		4,305		—		4,305		4,305		—		—
	W	15,705,513		987,974		14,717,539		9,870,343		67,846		4,779,350
	December 31, 2013
	Gross amounts of recognized financial liabilities		Gross amounts of recognized financial assets set off in the statement of financial position		Net amounts of financial liabilities presented in the statement of financial position		Related amounts not set off in the statement of financial position				Net amount
							Financial instruments		Cash collateral received
Derivative financial liabilities(*)	W	3,880,101		—		3,880,101		2,486,797		—		1,393,304
Outstanding spot exchange(*)		2,635,493		—		2,635,493		2,629,396		—		6,097
Unsettled domestic exchange payables		1,273,939		987,974		285,965		—		—		285,965
Repurchase agreements sold		4,124,630		—		4,124,630		4,124,630		—		—
Payables from securities transaction		3,020		—		3,020		3,020		—		—
	W	11,917,183		987,974		10,929,209		9,243,843		—		1,685,366

(*) For the derivatives covered by the ISDA derivative contracts, all contracts are settled and the net amount of derivative contracts is measured and paid based on the liquidation value if the counterparty files for bankruptcy or has any credit issues.

122

Korea Development Bank

Notes to the Separate Financial Statements—(Continued)

For the years ended December 31, 2014 and 2013

(In millions of won)

46. Operating Segments

(1) The Bank has four reportable segments, as described below, which are the Bank’s strategic business units. The following summary describes the operations in each of the Bank’s reportable segments:

Industry	General information
Corporate finance	Provides trading services , and loans to corporate customers
Investment finance	Provides consulting services to corporate such as capital finance, restructuring, etc.
Asset management	Provides asset management services to individual and corporate customers
Others	Any other segment not mentioned above

(2) Operating income (loss) from external customers and among operating segments for the years ended December 31, 2014 and 2013 are as follows:

	December 31, 2014
	Corporate finance		Investment finance			Asset management		Others			Total
Operating income (loss) from external customers	W	385,735		(566,121	)		21,047		584,028			424,689
Operating income (loss) from intersegment sales		34,823		204,807			—		(239,630	)		—
	W	420,558		(361,314	)		21,047		344,398			424,689

	December 31, 2013
	Corporate finance			Investment finance			Asset management		Others			Total
Operating income (loss) from external customers	W	(475,122	)		(380,773	)		21,509		(23,739	)		(858,125	)
Operating income (loss) from intersegment sales		6,472			(137,600	)		—		131,128			—
	W	(468,650	)		(518,373	)		21,509		107,389			(858,125	)

(3) Details of segment results for the Bank’s reportable segments for the years ended December 31, 2014 and 2013 are as follows:

	December 31, 2014
	Corporate finance			Investment finance			Asset management			Others			Total
Operating revenues:
Net interest income	W	1,465,790			(5,200	)		5,029			522,875			1,988,494
Non-interest income (loss), net		305,883			166,629			26,768			(143,740	)		355,540
Income (loss) related to securities(*1)		125,889			(157,909	)		—			79,589			47,569
		1,897,562			3,520			31,797			458,724			2,391,603
General administrative expenses		(354,526	)		(88,256	)		(10,750	)		(103,268	)		(556,800	)
Provision for loan losses and others(*2)		(1,122,478	)		(276,578	)		—			(11,058	)		(1,410,114	)
Operating income (loss)	W	420,558			(361,314	)		21,047			344,398			424,689

123

Korea Development Bank

Notes to the Separate Financial Statements—(Continued)

For the years ended December 31, 2014 and 2013

(In millions of won)

	December 31, 2013
	Corporate finance			Investment finance			Asset management			Others			Total
Operating revenues:
Net interest income	W	1,434,723			(31,083	)		2,208			324,617			1,730,465
Non-interest income (loss), net		298,971			248,007			30,399			(190,982	)		386,395
Income (loss) related to securities(*1)		(137,023	)		(163,523	)		—			85,344			(215,202	)
		1,596,671			53,401			32,607			218,979			1,901,658
General administrative expenses		(345,912	)		(81,225	)		(11,098	)		(108,640	)		(546,875	)
Provision for loan losses and others(*2)		(1,719,409	)		(490,549	)		—			(2,950	)		(2,212,908	)
Operating income (loss)	W	(468,650	)		(518,373	)		21,509			107,389			(858,125	)

(*1) Income related to securities is composed of losses (gains) related to financial assets held for trading and available-for-sale financial assets.

(*2) Provision for loan losses and others comprises of provision for loan losses, provision for derivative credit risks, losses (gains) on sales of loans, and provision for other losses.

(4) Geographical revenue information about the Bank’s operating segments for the years ended December 31, 2014 and 2013 and the geographical non-current asset information as of December 31, 2014 and 2013 are as follows:

	Revenues(*1)				Non-current assets(*2)
	December 31, 2014		December 31, 2013		December 31, 2014		December 31, 2013
Domestic	W	13,866,661		12,832,760		27,556,072		5,574,413
Overseas		940,277		795,166		3,887		3,355
	W	14,806,938		13,627,926		27,559,959		5,577,768

(*1) Revenues consist of interest income, fees and commission income, income related to securities, foreign currency transaction gain, gain on derivative, other operating income and provision for loan losses. Operating revenues are not reconciled to the income statement which discloses net amounts of some accounts.

(*2) Non-current assets consist of investments in subsidiaries and associates, property and equipments, investment properties, and intangible assets.

47. Merger with Controlling Entities

(1) General Information

The Bank merged with its controlling entities, KDB Financial Group Inc. and Korea Finance Corporation, in accordance with the Korean Development Bank Act as of December 31, 2014. Through the merger, KDB Financial Group Inc. and Korea Finance Corporation become predecessor entities, and the Bank, the sole existing entity after the merger. Progress of the merger is as follows:

• October 7, 2014, Merger agreement approved and agreed by board of directors (*)

• October 17, 2014, Merger agreement signed

124

Korea Development Bank

Notes to the Separate Financial Statements—(Continued)

For the years ended December 31, 2014 and 2013

• October 29, 2014, Merger plans approved by the Financial Service Commission

• December 31, 2014, Announcement of merger during the general meeting of shareholders, merger registration

(*) the merger agreement approval during the general shareholders meeting is replaced with the agreement approved by the board of directors according to the Korean Development Bank Act.

All of the 1,856,372,235 shares(par value of W9,281,861 million, W5,000 per share) that were originally issued and 100% retained by KDB Financial Group Inc., were retired following the merger. The government of the Republic of Korea, a shareholder of KDB Financial Group Inc. and Korea Finance Corporation, was issued new shares of 3,036,079,768 shares (par value of W15,180,399 million, W5,000 per share).

(2) Measurement of assets and liabilities

The business combination is a transaction under common control. Therefore the Group recognizes the acquired assets and liabilities as carrying amounts in the consolidated financial statements of the ultimate parent company, KoFC, as of December 30, 2014. And the Group reflects the difference between the consideration paid and the capital of the acquiree in the capital surplus.

125

Korea Development Bank

Notes to the Separate Financial Statements—(Continued)

For the years ended December 31, 2014 and 2013

(In millions of won)

(3) Amount of acquired assets and liabilities

The acquired assets and liabilities recognized as of December 31, 2014 are as follows.

Classification	Amounts
Assets
Cash and due from banks	W	3,135,742
Available-for-sale financial assets		14,496,982
Loans		26,739,472
Derivative financial assets		254,739
Investments in subsidiaries and associates		21,884,099
Property and equipment		64,428
Investment property		18,064
Intangible assets		14,094
Deferred tax assets		650
Other assets		1,533,263
		68,141,533
Liabilities
Borrowings		3,677,446
Bonds		52,077,882
Derivative financial liabilities		299,430
Defined benefit liabilities		11,224
Provisions		41,234
Deferred tax liabilities		2,838,223
Other liabilities		420,149
		59,365,588
Equity
Valuation gain on available-for-sale financial assets		404,892
Valuation loss on cash flow hedge		(12,843	)
Remeasurements of defined benefit liabilities		(598	)
		391,451
The acquired assets, liabilities and equity	W	8,384,494
Consideration transferred in the acquisition		5,898,538
Registration tax		7,309
Other capital surplus	W	2,478,647

48. Risk Management

(1) Introduction

(i) Objectives and principles

The Bank’s risk management aims to maintain financial soundness and effectively manage various risks pertinent to the nature of the Bank’s business. The Bank has set up and fulfilled policies to manage risks timely and effectively. Pursuant to the policies, the Bank’s risks shall be

• managed comprehensively and independently,

126

Korea Development Bank

Notes to the Separate Financial Statements—(Continued)

For the years ended December 31, 2014 and 2013

• recognized timely, evaluated exactly and managed effectively,

• maintained to the extent that the risks balance with profit,

• diversified appropriately to avoid concentration on specific segments,

• managed to prevent excessive exposure by the setting up and managing of tolerance limits and guidelines.

(ii) Risk management strategy and process

The Bank’s risk management business is separated into two different stages; the ‘quantification stage,’ in which risks are estimated and monitored, and the ‘integration stage,’ in which information gained during the risk management process is integrated and used in management strategies. Risk management is recognized as a key component of the Bank’s management, and seeks to change from its previously adaptive and limited role to more leading and comprehensive role.

Furthermore, the Bank focuses on consistent communication among different departments in order to establish a progressive consensus on risk management.

(iii) Risk management governance

Risk Management Committee

The Bank’s Risk Management Committee (the “Committee”) is composed of the President of the committee (an outside director), and four other commissioners including the CEO of the Bank. The Committee functions to establish policies of risk management, evaluate the capital adequacy of the Bank, discuss material issues relating to risk management, and present preliminary decisions on such matters.

The CEO of the Bank and the head of Risk Management Department

The CEO of the Bank, according to the policies of risk management, performs his or her role to manage and direct risk management in order to sustain efficiency and internal control. The head of the Risk Management Department is responsible for supervising the overall administration of the Bank’s risk management business and providing risk-related information to members of the board of directors and the Bank’s management.

Risk Management Practice Committee

The Bank’s Risk Management Practice Committee is composed of the main leaders of business segments, and exercises its role to review matters for decision on allocation by segment of internal capital limits and other material risk-related matters.

(iv) Performance of Risk Management Committee

The Risk Management Committee performs comprehensive reviews of all the affairs related to risk management and deliberates the decisions of the board of directors. For the year ended December 31, 2014 the key activities of the Risk Management Committee are as follows:

• Major deliberation and resolution

• Changes in probability of default for BIS capital ratio

127

Korea Development Bank

Notes to the Separate Financial Statements—(Continued)

For the years ended December 31, 2014 and 2013

• Changes in applying interest rate on principal and interest guaranteed retirement pension

• Major reporting

• Resolutions from the Credit Committee and the Board of Investment in the fourth quarter of 2013

• Resolutions from the Credit Committee and the Board of Investment in the first quarter of 2014

• Resolutions from the Credit Committee and the Board of Investment in the second quarter of 2014

• Resolutions from the Credit Committee in the third quarter of 2014

• Integrated crisis analysis on first half-year for 2014

• Integrated crisis analysis on second half-year for 2014

• Recent global financial trends and regulatory countermeasures

• Allocation and management standards of internal capital limits for 2014

• BIS capital ratio management objectives and internal capital planning for 2014

• Corporate credit ratings for 2014

• Management of credit risk premiums for household loans

• Report on simulation of Business Continuity Planning (BCP)

• Compatibility evaluation for the credit rating model and default rates for 2014

(v) Improvement of risk management system

For the continuous improvement of risk management, financial soundness and capital adequacy, the Bank performs the following:

• Continuous improvement of Basel

• Improvements in the internal capital adequacy assessment system, in line with the guidelines set by the Financial Supervisory Service (“FSS”) in 2008, to manage capital adequacy more effectively

• Improvements in the credit assessment system on Low Default Portfolio (“LDP”)

• Elaboration of risk measuring criteria including credit risk parameters and measurement logics

• Pre-operation of the Advanced Measurement Approach (“AMA”) since 2009, in arrangement with the FSS, to apply the risk management AMA

• Expansion of risk management infrastructure to the global IB level

• Establishment of the RAPM system in order to reflect risks to the Bank’s business and support decision-making upon management, and application of performance assessment at the branch level since 2010

• Enforcement of risk management related to irregular compound derivatives and validation of the derivative pricing model developed by the Bank’s Front Office

• Risk management of retail banking

• On-going planning of asset expansion in the retail banking risk management operations sector of the department of risk management since the introduction of retail loan business in 2010

128

Korea Development Bank

Notes to the Separate Financial Statements—(Continued)

For the years ended December 31, 2014 and 2013

• Establishment and application of assessment and approval standards by retail loan instruments, and expansion of retail banking risk management infrastructure such as accumulating databases in order to support analytic decision-making and develop a personal credit assessment model through the establishment of a “retail banking Data Mart”

• To supplement the limit of an evaluation process with computerized system, the group adopted ‘underwriter’ which complements the evaluation system.

(vi) Risk management reporting and measuring system

The Bank endeavours consistently to objectively and rationally measure and manage all significant risks considering the characteristics of operational areas, assets and risks. In relation to reporting and measurement, the Bank has developed application systems as follows:

Application system	Approach	Completion date	Major function
Corporate Credit Rating System	Logit Model	Jun. 2004 Mar. 2008 Mar. 2010	Calculate corporate credit rating
Credit Risk Measurement System	Credit Risk+ Credit Metrics	Jul. 2003 Nov. 2007	Summarize exposures, manage exposure limits and calculate Credit VaR
Market Risk Management System	Risk Watch	Jun. 2002	Summarize position, manage exposure limits and calculate Market VaR
Interest/Liquidity Risk Management System	OFSA	Feb. 2006	Calculate repricing gap, duration gap, VaR and EaR
Operational Risk Management System	Standardized Approach AMA	May 2006 May 2009	Manage process and calculate CSA, KRI, OP and VaR Pre-operate the AMA

(vii) Response to Basel

The Korean authority implemented Basel II as of January 2008, and adopted the Standardized Approach and the Foundation Internal Ratings-Based Approach. The Advanced Approaches were adopted later in 2009.

In conformity with the implementation roadmap of Basel II, the Bank obtained the approval to use the Foundation Internal Ratings-Based Approach on credit risk from the FSS in July 2008 and has applied the approach since late June 2008. The Bank applies the Standardized Approach on market risks and operational risks.

To establish credibility and maintain financial soundness, the Bank plans to adopt the Advanced Approaches (Credit risk: Advanced Internal Ratings-Based Approach, Operational risk: Advanced Measurement Approach etc) by continuously improving related systems and policies. Furthermore, the Bank completed the “Basel III standard risk management system” in preparation of the adoption of the Basel III regulations announced on December 1, 2013. Starting from 2013 year-end, the BIS capital adequacy ratio was measured in accordance to the Basel III regulations.

129

Korea Development Bank

Notes to the Separate Financial Statements—(Continued)

For the years ended December 31, 2014 and 2013

(viii) Internal capital adequacy assessment process

Internal capital adequacy assessment process is defined as the process that the Bank aggregates significant risks, calculates its internal capital, compares the internal capital with the available capital and assesses its internal capital adequacy.

• Internal capital adequacy assessment

For the purpose of the internal capital adequacy assessment, the Bank calculates its aggregated internal capital and available capital by evaluating all significant risks and taking into account the quality and components of capital, and then assesses the internal capital adequacy by comparing the aggregated internal capital with the available capital.

• Goal setting of internal capital management

The Bank sets up and manages an internal capital limit on an annual basis, through the approval of the Risk Management Committee, in order to maintain internal capital adequacy by managing internal capital (integrated risks) within the extent of available capital.

The prior year’s internal capital, analysis of domestic and foreign environment changes in the current year, and the direction and size of operations are all reflected in the goal setting of internal capital management to calculate the integrated internal capital scale. Moreover, Bank for International Settlements(“BIS”) capital adequacy ratio and risk appetite are taken into consideration in the goal setting of internal capital management

• Allocation of internal capital

The Bank’s entire internal capital is allocated to each headquarter and department, according to the extent of possible risk faced and size of operations, after the Risk Management Committee’s deliberation and the board of directors’ approval. The allocated internal capital is monitored regularly and managed using various management methods. The results of monitoring and managing the allocated internal capital are reported to the Risk Management Committee. In case of any material changes in the Bank’s business plan or risk operation strategy, the Bank adjusts the allocations elastically.

• Composition of internal capital

Internal capital comprises all the significant risks of the Bank and is composed of quantifiable and non-quantifiable risks. Quantifiable risks are composed of credit risk, market risk, interest rate risk, operational risk and credit concentration risk, and are risks measured quantitatively by applying reasonable methodology using objective data. Non-quantifiable risks are composed of strategy risk, reputation risk, residual risk on asset securitization and furthermore. Non-quantifiable risks are those risks that cannot be measured quantitatively because of lack of data or the absence of appropriate measuring methodologies.

(2) Credit Risk

(i) Concept

Credit risk can be defined as potential loss resulting from the refusal to perform obligations or default of counterparties. More generally, it is used to refer to the possibility of loss from engaged bonds that cannot be redeemed properly or from substitute payments.

130

Korea Development Bank

Notes to the Separate Financial Statements—(Continued)

For the years ended December 31, 2014 and 2013

(ii) Approach to credit risk management

Summary of credit risk management

The Bank regards credit risk as the most significant risk area in its business operations, and accordingly, closely monitors its credit risk exposure. The Bank manages both credit risks at portfolio level and at individual credit level. At portfolio level, the Bank reduces credit concentration and restructures the portfolio in such a way to maximize profitability considering the risk level. To avoid credit concentration on a particular sector, the Bank manages credit limits by client, group, and industry. The Bank also resets exposure management directives for each industry by conducting an industry credit evaluation twice a year.

At the individual credit level, the relationship manager (“RM”), the credit officer (“CO”) and the Credit Review Committee manage each borrower’s credit risk.

Post management and insolvent borrower management

The Bank monitors the borrower’s credit rating from the date of the loan to the date of the final collection of debt consistently, and inspects the borrower’s status regularly and frequently in order to prevent the generation of new bad debts and to stabilize the number of debt recoveries.

In addition, an early warning system is operated to spot borrowers that are highly likely to be insolvent. The early warning system provides financial information, financial transaction information, public information and market information of the borrower, and such information is used by the RM and the CO to monitor and manage changes in the borrower’s credit rating.

Under the early warning system, a borrower that is highly likely to be insolvent is classified as an early warning borrower or a precautionary borrower The Bank sets up a specific and applicable stabilization plan for such a borrower considering the borrower’s characteristics. Furthermore, sub-standard borrowers are classified as insolvent borrowers, and are managed intensively by the Bank, which takes legal proceedings, disposals or corporate turnaround measures if necessary.

Classification of asset soundness and provision of allowance for loss

Classification of asset soundness is fulfilled by the analysis and assessment of credit risk. The classification is used in order to provision an appropriate allowance, prevent further occurrences of insolvent assets and promote the normalization of existing insolvent assets to enhance the stabilization of asset operations.

Based on the Financial Supervisory Regulations of the Republic of Korea, the Bank has established standards and guidelines on the classification of asset soundness, according to the Forward Looking Criteria (“FLC”), which reflects not only the borrower’s past records of repayment but also their future debt repayment capability.

In conformity with these standards, the Bank classifies the soundness of its assets as “normal”, “precautionary”, “substandard”, “doubtful”, or “estimated loss” and differentiates the coverage ratio by the level of classification.

131

Korea Development Bank

Notes to the Separate Financial Statements—(Continued)

For the years ended December 31, 2014 and 2013

(In millions of won)

Loans

Details of loans as of December 31, 2014 and 2013 are as follows:

	December 31, 2014			December 31, 2013
Neither past due nor impaired	W	129,807,569			93,616,632
Past due but not impaired		128,759			142,150
Impaired		6,823,773			4,361,030
		136,760,101			98,119,812
Allowance for loan losses		(2,398,658	)		(1,773,150	)
Present value discount		(55,418	)		(43,577	)
Deferred loan origination costs and fees		8,441			5,328
Net value	W	134,314,466			96,308,413
Ratio of allowance for loan losses to total loans		1.75	%		1.81	%

Loans that are neither past due nor impaired

Loans that are neither past due nor impaired as of December 31, 2014 and 2013 are as follows:

	December 31, 2014
	Loans in Korean won								Other loans
	Loans for working capital		Loans for facility developments		Others		Loans in foreign currencies		Private placed corporate bonds		Others		Total
AAA ~ B- (Normal)	W	37,482,930		49,669,053		4,322,696		24,353,063		2,417,248		9,960,031		128,205,021
CCC (Precautionary)		673,429		300,685		—		177,311		34,668		294,278		1,480,371
CC (Substandard)		31,866		9,362		—		218		56,932		23,799		122,177
C (Doubtful)		—		—		—		—		—		—		—
D (Estimated loss)		—		—		—		—		—		—		—
	W	38,188,225		49,979,100		4,322,696		24,530,592		2,508,848		10,278,108		129,807,569

	December 31, 2013
	Loans in Korean won								Other loans
	Loans for working capital		Loans for facility developments		Others		Loans in foreign currencies		Private placed corporate bonds		Others		Total
AAA ~ B- (Normal)	W	24,327,659		32,669,282		2,765,568		19,941,319		2,993,711		8,585,850		91,283,389
CCC (Precautionary)		889,345		420,820		—		351,995		26,493		201,321		1,889,974
CC (Substandard)		190,426		70,222		—		37,560		104,296		40,765		443,269
C (Doubtful)		—		—		—		—		—		—		—
D (Estimated loss)		—		—		—		—		—		—		—
	W	25,407,430		33,160,324		2,765,568		20,330,874		3,124,500		8,827,936		93,616,632

132

Korea Development Bank

Notes to the Separate Financial Statements—(Continued)

For the years ended December 31, 2014 and 2013

(In millions of won)

Loans that are past due but not impaired

Loans that are past due but not impaired as of December 31, 2014 and 2013 are as follows:

	December 31, 2014
	Loans in Korean won								Other loans
	Loans for working capital		Loans for facility developments		Others		Loans in foreign currencies		Private placed corporate bonds		Others		Total
Within 30 days	W	21,549		59,255		2,876		39,598		1,450		574		125,302
Within 30 ~ 60 days		368		450		274		—		—		—		1,092
Within 60 ~ 90 days		—		317		178		—		1,870		—		2,365
	W	21,917		60,022		3,328		39,598		3,320		574		128,759

	December 31, 2013
	Loans in Korean won								Other loans
	Loans for working capital		Loans for facility developments		Others		Loans in foreign currencies		Private placed corporate bonds		Others		Total
Within 30 days	W	47,318		35,477		2,947		29,249		12,200		11,326		138,517
Within 30 ~ 60 days		250		—		198		—		—		—		448
Within 60 ~ 90 days		1,170		991		—		1,024		—		—		3,185
	W	48,738		36,468		3,145		30,273		12,200		11,326		142,150

Impaired loans

Impaired loans as of December 31, 2014 and 2013 are as follows:

	December 31, 2014
	Loans in Korean won								Other loans
	Loans for working capital		Loans for facility developments		Others		Loans in foreign currencies		Private placed corporate bonds		Others		Total
Impaired Loans:
Individual	W	3,794,515		1,498,110		—		114,604		533,207		668,579		6,609,015
Collective		82,158		37,215		4,271		63,222		7,850		20,042		214,758
	W	3,876,673		1,535,325		4,271		177,826		541,057		688,621		6,823,773

	December 31, 2013
	Loans in Korean won								Other loans
	Loans for working capital		Loans for facility developments		Others		Loans in foreign currencies		Private placed corporate bonds		Others		Total
Impaired Loans:
Individual	W	2,316,343		583,176		—		73,123		706,576		491,821		4,171,039
Collective		90,433		59,652		305		18,636		3,780		17,185		189,991
	W	2,406,776		642,828		305		91,759		710,356		509,006		4,361,030

133

Korea Development Bank

Notes to the Separate Financial Statements—(Continued)

For the years ended December 31, 2014 and 2013

(In millions of won)

(iii) Measurement methodology of credit risk

Pursuant to Basel II, the Bank selects the measurement methodology of credit risk considering the complexity of measurement, measurement factors, estimating methods and others. Measurement approaches are divided into Standardized Approach and Internal Ratings-Based Approach.

Standardized Approach (“SA”)

In the case of the Standardized Approach, the risk weights are applied according to the credit rating assessed by External Credit Assessment Institution (“ECAI”). Risk weights in each credit rating are as follows:

Credit rating(*)	Corporate	Country	Bank	Asset securitization
AAA ~ AA-	20.00%	0.00%	20.00%	20.00%
A+ ~ A-	50.00%	20.00%	50.00%	50.00%
BBB+ ~ BBB-	100.00%	50.00%	100.00%	100.00%
BB+ ~ BB-	100.00%	100.00%	100.00%	350.00%
B+ ~ B-	150.00%	100.00%	100.00%	Deducted from Equity (1,250%)
Below B-	150.00%	150.00%	150.00%	”
Unrated	100.00%	100.00%	100.00%	”

(*) Credit rating refer to those evaluated by global credit rating agencies such as S&P or Moody’s

The OECD, S&P, Moody’s and Fitch are designated as foreign ECAI and Korea Investors Service Co., Ltd., NICE Investors Services Co., Ltd. and the Korea Ratings Co., Ltd. are designated as domestic ECAI.

The Bank applies the credit rating based on the corresponding loan and same borrower’s unsecured senior loans. In the case the borrower’s risk weight is higher than the unrated exposure’s risk weight (100%), the higher weight is applied. In the case the borrower has more than one rating, the higher weight of the two lowest weights (second best criteria) is applied.

Internal Ratings-Based Approach (“IRB”)

To use the Internal Ratings-Based Approach, a bank must be approved by the FSS and should also meet the requirement pre-set by the FSS.

In relation to Basel II that has been adopted domestically as of January 2008, the Bank gained approval from the FSS to use the Foundation Internal Ratings-Based Approach in July 2008. The Bank has calculated credit risk-weighted assets using the approach since late June 2008.

Measurement method of credit risk-weighted asset

The Bank calculates credit risk-weighted assets of corporate exposures and asset securitization exposures using the Foundation Internal Ratings-Based Approach as of December 31, 2014.

The Standardized Approach is applied to country exposures, public institution exposures and bank exposures according to the interpretation of the FSS permanently, and applied to overseas subsidiary and the Bank’s branch pursuant to prior consultation with the FSS.

The Standard Approach is applied to special finance, non-residents, non-banking financial institutions currently, and will be replaced by the Internal Ratings-Based Approach in the future.

134

Korea Development Bank

Notes to the Separate Financial Statements—(Continued)

For the years ended December 31, 2014 and 2013

(In millions of won)

<Approved measurement method>
Measurement method		Exposure
Standardized Approach	Permanent
	SA(*1)	—Countries, public institutions and banks
	SA(*2)	—Overseas subsidiaries and branches, and other assets
Foundation Internal Ratings-Based Approach		—Corporate and small and medium enterprises and asset securitization (at each credit level)
Application of IRB by phase		—Special lending, non-residence, non-bank financial institutions

(*1) Pursuant to the interpretation of the FSS, the Standardized Approach is applied to the exposures of governments, banks and other public institutions.

(*2) The Standardized Approach is applied, pursuant to prior consultation with the FSS, in the case the credit risk-weighted assets of a specific business segment is less than 15% of the entire credit risk-weighted assets.

The mitigated effect of credit risks reflects the related policies which consider eligible collateral and guarantees. The Bank calculates the credit risk-weighted assets using the capital adequacy ratio.

Upon the calculation of credit risk-weighted assets for derivatives, the Bank takes into consideration the set-off effects of transactions under legally enforceable rights to set-off to calculate exposures.

Exposure less credit risk mitigation by asset type as of December 31, 2014 and 2013 are as follows:

	December 31, 2014
	Exposure		Credit risk mitigation			Exposure less credit risk mitigation
Government	W	17,598,368		—			17,598,368
Bank		19,771,779		—			19,771,779
Corporate		133,890,444		(314,084	)		133,576,360
Stock		28,961,181		—			28,961,181
Indirect investments		3,080,647		—			3,080,647
Asset securitization		4,026,945		—			4,026,945
Over-the-counter derivatives		8,331,185		(4,932,238	)		3,398,947
Retail assets		3,289,945		(54,860	)		3,235,085
Others		54,382,011		(1,972,114	)		52,409,897
	W	273,332,505		(7,273,296	)		266,059,209

135

Korea Development Bank

Notes to the Separate Financial Statements—(Continued)

For the years ended December 31, 2014 and 2013

(In millions of won)

	December 31, 2013
	Exposure		Credit risk mitigation			Exposure less credit risk mitigation
Government	W	6,316,470		—			6,316,470
Bank		7,755,382		—			7,755,382
Corporate		112,830,802		(89,317	)		112,741,485
Stock		4,961,023		—			4,961,023
Indirect investments		4,011,423		—			4,011,423
Asset securitization		4,512,448		(4	)		4,512,444
Over-the-counter derivatives		7,473,065		(4,101,307	)		3,371,758
Retail assets		1,950,113		(41,619	)		1,908,494
Others		31,298,951		(4,377,195	)		26,921,756
	W	181,109,677		(8,609,442	)		172,500,235

Credit rating model

The results of credit rating are presented as grades through an assessment of the debt repayment capacity that the principal and interest of debt securities or loans are redeemed while complying with contractual redemption schedule.

Using the Bank’s internal credit rating model, the Bank classifies debtors’ credit rating into 10 grades (AAA~D). Plus sign (+) and minus sign (-) are attached to the grades (AA~B) to distinguish the difference between credits in the same grade. As a result, the Bank’s credit rating model uses 20 grades.

The Bank’s regular credit rating process is carried out once a year and in the case of the change of debtor’s credit condition, the credit rating is frequently adjusted as necessary to retain the adequacy of credit rating.

The results of credit rating is applied to various areas such as discrimination of loan processes, loan limit, loan interest rate, post loan management standard process, credit risk measurement, and allowance for loan losses assessment.

Credit process control structure

According to the Principle of Checks and Balances the Bank has established the credit process control structure by which the credit rating system operates appropriately.

• Independent assessment of credit rating: The Bank’s business segment (RM) and credit rating assessment segment (CO) are independently operated

• Independent control of credit rating system: The control of credit rating system including the development of credit rating model is independently implemented by the Bank’s Risk Management Department.

• Independent verification of credit rating system: Credit rating system is independently verified by the validation team of the Consulting Service Department.

• Internal audit of credit rating process: Credit rating process is audited by the Bank’s internal audit department.

136

Korea Development Bank

Notes to the Separate Financial Statements—(Continued)

For the years ended December 31, 2014 and 2013

(In millions of won)

• Role of the Board of Directors and the Bank’s management: Major issues relating to credit process are approved by the Board of Directors and are regularly monitored by the Bank’s top management.

The Bank reviews debt serviceability based on a credit analysis when handling loans. Depending on the results, credit loan preservation is adjusted as necessary using such methods as interest rate preservation due to credit risk.

The Bank evaluates the value of the collateral, performing ability and legal validity of the guarantee at the initial acquisition. The Bank re-evaluates the provided collateral and guarantees regularly for them to be reasonably preserved.

For guarantees, the Bank demands a corresponding written guarantee according to loan handling standards and the guarantor’s credit rating is independently calculated when in conformance with the credit rating endowment method

(iv) Credit exposure

Geographical information of credit exposure

Geographical information of credit exposure as of December 31, 2014 and 2013 are as follows:

	December 31, 2014
	Korea		UK		USA		Others		Total
Due from banks (excluding due from BOK)	W	3,367,266		121,938		261,916		1,002,566		4,753,686
Available-for-sale financial assets:
Bonds (excluding government bonds)		13,662,439		677,198		510,356		442,494		15,292,487
Held-to-maturity financial assets:
Bonds (excluding government bonds)		—		—		—		11,340		11,340
Loans		128,650,703		276,292		650,727		4,652,097		134,229,819
Derivative financial assets		863,183		1,474		—		191		864,848
Other assets		5,351,109		45,985		6,432		28,762		5,432,288
		151,894,700		1,122,887		1,429,431		6,137,450		160,584,468
Financial guarantees		11,863,362		—		143,317		127,695		12,134,374
Credit related commitment (Commitments on loans and others)		6,485,046		111,516		199,731		345,980		7,142,273
		18,348,408		111,516		343,048		473,675		19,276,647
	W	170,243,108		1,234,403		1,772,479		6,611,125		179,861,115

137

Korea Development Bank

Notes to the Separate Financial Statements—(Continued)

For the years ended December 31, 2014 and 2013

(In millions of won)

	December 31, 2013
	Korea		UK		USA		Others		Total
Due from banks (excluding due from BOK)	W	2,723,248		89,746		77,600		697,309		3,587,903
Available-for-sale financial assets:
Bonds (excluding government bonds)		13,796,914		615,908		502,198		433,866		15,348,886
Held-to-maturity financial assets:
Bonds (excluding government bonds)		20,000		—		—		—		20,000
Loans		130,786,722		212,432		363,786		3,517,216		134,880,156
Derivative financial assets		623,473		2,670		—		150		626,293
Other assets		3,870,697		7,489		1,516		10,025		3,889,727
		151,821,054		928,245		945,100		4,658,566		158,352,965
Financial guarantees		32,039,012		—		16,773		301,854		32,357,639
Credit related commitment (Commitments on loans and others)		6,219,899		228,875		759,216		3,162,384		10,370,374
		38,258,911		228,875		775,989		3,464,238		42,728,013
	W	190,079,965		1,157,120		1,721,089		8,122,804		201,080,978

Industry information of credit exposure

Industry information of credit exposure as of December 31, 2014 and 2013 are as follows:

	December 31, 2014
	Manufacturing		Service		Others		Total
Due from banks (excluding due from BOK)	W	—		4,182,831		570,855		4,753,686
Available-for-sale financial assets:
Bonds (excluding government bonds)		4,532,118		8,919,309		1,841,060		15,292,487
Held-to-maturity financial assets:
Bonds (excluding government bonds)		—		—		11,340		11,340
Loans		62,661,910		60,470,685		11,097,224		134,229,819
Derivative financial assets		—		864,848		—		864,848
Other assets		96,384		217,810		5,118,094		5,432,288
		67,290,412		74,655,483		18,638,573		160,584,468
Financial guarantees		8,682,351		2,245,665		1,206,358		12,134,374
Credit related commitment (Commitments on loans and others)		615,758		4,210,578		2,315,937		7,142,273
		9,298,109		6,456,243		3,522,295		19,276,647
	W	76,588,521		81,111,726		22,160,868		179,861,115

138

Korea Development Bank

Notes to the Separate Financial Statements—(Continued)

For the years ended December 31, 2014 and 2013

(In millions of won)

	December 31, 2013
	Manufacturing		Service		Others		Total
Due from banks (excluding due from BOK)	W	—		906,468		2,681,435		3,587,903
Available-for-sale financial assets:
Bonds (excluding government bonds)		3,594,458		9,516,201		2,238,227		15,348,886
Held-to-maturity financial assets:
Bonds (excluding government bonds)		—		20,000		—		20,000
Loans		68,029,275		55,442,757		11,408,124		134,880,156
Derivative financial assets		—		619,937		6,356		626,293
Other assets		1,497		35,883		3,852,347		3,889,727
		71,625,230		66,541,246		20,186,489		158,352,965
Financial guarantees		23,175,529		3,719,758		5,462,352		32,357,639
Credit related commitment (Commitments on loans and others)		2,556,736		7,175,084		638,554		10,370,374
		25,732,265		10,894,842		6,100,906		42,728,013
	W	97,357,495		77,436,088		26,287,395		201,080,978

Credit rating information of credit exposure

Credit rating information of credit exposure as of December 31, 2014 and 2013 are as follows:

	December 31, 2014
	Due from banks		Available-for-sale financial assets		Held-to-maturity financial assets		Total
AAA ~ AA-	W	709,082		2,107,957		—		2,817,039
A+ ~ A-		3,255,871		3,494,789		—		6,750,660
BBB+ ~ BB-		601,381		7,772,633		11,340		8,385,354
Less than BB-		—		443,804		—		443,804
Unrated		187,352		1,473,304		—		1,660,656
	W	4,753,686		15,292,487		11,340		20,057,513

	December 31, 2013
	Due from banks		Available-for-sale financial assets		Held-to-maturity financial assets		Total
AAA ~ AA-	W	82,722		2,808,254		—		2,890,976
A+ ~ A-		197,251		3,920,254		20,000		4,137,505
BBB+ ~ BB-		628,927		7,280,183		—		7,909,110
Less than BB-		—		335,455		—		335,455
Unrated		2,679,003		1,004,740		—		3,683,743
	W	3,587,903		15,348,886		20,000		18,956,789

(3) Capital management activities

(i) Capital adequacy

The FSS approved the Bank’s use of the Foundation Internal Ratings-Based Approach in July 2008. The Bank has been using the same approach when calculating credit risk-weighted assets since the end of June, 2008.

139

Korea Development Bank

Notes to the Separate Financial Statements—(Continued)

For the years ended December 31, 2014 and 2013

The equity capital ratio and equity capital according to the standards of the Bank for International Settlements are calculated for the purpose of such disclosure. The equity capital ratio and equity capital are calculated on a consolidated basis. The equity capital ratio and equity capital are calculated on a consolidated basis. In conformity with the Banking Act, which is based on the implementation of Basel III on December 1, 2013, the regulatory capital is divided into the following two categories.

Tier 1 capital

- Common Equity Tier 1

Regulatory capital that represents the most subordinated claim in liquidation of the Bank, takes the first and proportionately greatest share of any losses as they occur, and which principal is never repaid outside of liquidation meets the criteria for classification as common equity, including capital stock, capital surplus, retained earnings, qualifying noncontrolling interest in subsidiaries, and accumulated other comprehensive income as common equity Tier 1.

- Additional Tier 1 capital

Capital stock and capital surplus related to issuance of capital securities that are subordinated, have non-cumulative and conditional dividends or interests, and have no maturity or step-up conditions.

Tier 2 capital (Supplementary capital)

Regulatory capital that fulfills supplementary capital adequacy requirements, and includes subordinated debt with maturities over 5 years and allowance for loan losses in conformity with external regulatory standards and internal standards.

140

Korea Development Bank

Notes to the Separate Financial Statements—(Continued)

For the years ended December 31, 2014 and 2013

(In millions of won)

The BIS capital adequacy ratio and capital in accordance to Basel III standards as of December 31, 2014 and 2013 are as follows:

BIS capital adequacy ratio

	December 31, 2014			December 31, 2013
Equity capital based on BIS (A):
Tier 1 capital
Common equity Tier 1	W	23,956,799			15,300,310
Additional Tier 1 capital		1,882,284			14,679
		25,839,083			15,314,989
Tier 2 capital		3,897,953			2,890,445
		29,737,036			18,205,434
Risk-weighted assets (B):
Credit risk-weighted assets		204,073,901			119,304,037
Market risk-weighted assets		7,371,563			523,154
Operational risk-weighted assets		6,033,418			4,515,292
	W	217,478,882			124,342,483
BIS capital adequacy ratio (A/B):		13.67	%		14.64	%
Tier 1 capital ratio		11.88	%		12.32	%
Common equity Tier 1 ratio		11.02	%		12.30	%
Additional Tier 1 capital ratio		0.86	%		0.02	%
Tier 2 capital ratio		1.79	%		2.32	%

141

Korea Development Bank

Notes to the Separate Financial Statements—(Continued)

For the years ended December 31, 2014 and 2013

(In millions of won)

Equity capital based on BIS

	December 31, 2014			December 31, 2013
Equity capital (A+B)	W	29,737,036			18,205,434
Tier 1 capital (A=C+D):
Common Equity Tier 1 (C)
Capital stock		15,180,399			9,261,811
Capital surplus		1,608,052			46,977
Retained earnings		6,657,673			5,687,488
Non-controlling interest		1,831			1,030
Other comprehensive income		718,536			446,657
Other capital adjustments		220,562			(1,238	)
Common stock deductibles		(430,254	)		(142,415	)
		23,956,799			15,300,310
Additional Tier 1 Capital (D)
Non-controlling interest		1,882,284			14,679
		25,839,083			15,314,989
Tier 2 capital (B):
Allowance for doubtful accounts, etc.		1,050,981			567,543
Non-qualified capital securities		2,064,477			2,322,537
Qualified capital securities		700,000			—
Non-controlling interest		82,495			365
	W	3,897,953			2,890,445

(4) Market risk

(i) Concept

Market risk is defined as the possibility of potential loss on a trading position resulting from fluctuations in interest rates, foreign exchange rates and the price of stocks 1and derivatives. Trading position is exposed to risks, such as interest rate, stock price, and foreign exchange rate, etc. Non-trading position is mostly exposed to interest rates. Accordingly, the Bank classifies market risks into those exposed from trading position or those exposed from non-trading position.

(ii) Market risks of trading positions

Management method on market risks arising from trading positions

Trading position includes securities, foreign exchange position, and derivatives which are traded for short-term profits.

Market risk is managed using VaR limit and loss limit. VaR limit is calculated in the view of entire bank and the calculated VaR limit is distributed into each department and each type (stock price, interest rate, foreign exchange rate and option). The trading department regulates and operates terms of stop loss and investment limits.

142

Korea Development Bank

Notes to the Separate Financial Statements—(Continued)

For the years ended December 31, 2014 and 2013

(In millions of won)

Using the Standardized Approach and internal model of VaR, the Bank’s VaR is measured daily and the measured VaR is used for risk monitoring and limit management. In the estimation of VaR, the historical simulation and two other supplemental procedures are used: variance-covariance matrix and Monte Carlo simulation. Through the stress test and back test, the estimation of VaR is validated daily.

In estimating market risk, the Standardized Approach and the internal model are used. The Standardized Approach is used in order to calculate the required capital from market risk and the internal model is used in order to manage risks internally.

Since July 2007 the Bank has measured one-day VaR through the historical simulation method using the time series data of past 250 days under a 99% confidence level. The calculated VaR is monitored on a daily basis.

In the implementation of the stress test, the Bank applies three scenarios based on the fluctuation of market index that occurred at the time of the historical events that resulted in the significant shock such as the IMF crisis and the 9/11 attacks. The stress test is implemented by the system daily in order to provide for crisis occurrences. Furthermore, the Bank is conducting a contingency plan for market risk management. The plan distinguishes the crisis condition into three stages—precautious stage, precrisis stage and crisis stage—through the measurement of the market volatility.

For the validation of the market risk measurement methodology, the Bank daily implements the back testing that compares the simulated loss, the actual loss and the previous day’s VaR. In addition, the Bank enforces the market risk management relating to irregular compound derivatives through the validation of the derivative pricing model developed by the Bank’s Front Office.

VaR of trading position

The Bank’s VaR of trading position as of December 31, 2014 and 2013 are as follows:

	December 31, 2014
	Average			Max			Min			December 31, 2014
Interest rate	W	2,652			5,214			1,005			1,280
Stock price		747			1,358			110			546
Foreign exchange rate		808			3,777			243			1,040
Option		272			1,192			80			252
Diversification effect		(1,310	)		(5,468	)		(65	)		(1,040	)
	W	3,169			6,073			1,373			2,078

	December 31, 2013
	Average			Max			Min			December 31, 2013
Interest rate	W	2,701			4,483			1,079			3,937
Stock price		541			1,123			174			302
Foreign exchange rate		591			5,375			202			841
Option		156			614			50			147
Diversification effect		(1,146	)		(4,557	)		(93	)		(1,163	)
	W	2,843			7,038			1,412			4,064

143

Korea Development Bank

Notes to the Separate Financial Statements—(Continued)

For the years ended December 31, 2014 and 2013

(In millions of won)

(iii) Market risks of non-trading positions

Management method on market risks arising from non-trading positions

The most critical market risk that arises in non-trading position is the interest rate risk. Interest rate risk is defined as the likely loss resulting from the unfavorable fluctuation of interest rate in the Bank’s financial condition and is measured by interest rate VaR and interest rate EaR.

Interest rate VaR is the maximum amount of decrease in net asset value resulting from the unfavorable fluctuation of interest rate. Interest rate EaR is the maximum amount of decrease in net interest income resulting from the unfavorable fluctuation of interest rate for a year.

The Bank’s interest rate VaR and interest rate EaR are measured through the simulation of conclusive interest rate scenario with the Oracle Financial Services Application (OFSA) and are reported on a monthly basis to the Risk Management Committee. The Management’s target of interest rate VaR and interest rate EaR are approved at the beginning of the year. Additionally, the interest rate VaR and interest rate EaR on consolidated basis are calculated using the Standardized Approach in order to retain the consistency in the methods used by the Bank and its subsidiaries.

EaR/VaR of non-trading positions

The Bank’s EaR and VaR of non-trading positions as of December 31, 2014 and 2013 are as follows:

December 31, 2014
Interest rate shock	Interest rate VaR	Interest rate EaR
2.00%	W1,870,845	164,035
December 31, 2013
Interest rate shock	Interest rate VaR	Interest rate EaR
2.00%	W2,875	112,001

144

Korea Development Bank

Notes to the Separate Financial Statements—(Continued)

For the years ended December 31, 2014 and 2013

(In millions of won)

(iv) Foreign currency risk

Outstanding balances by currency with significant exposure as of December 31, 2014 and 2013 are as follows:

	December 31, 2014
	KRW		USD		EUR			JPY			GBP			Others			Total
Financial assets:
Cash and due from banks	W	1,316,343		4,549,959		4,891			57,706			1,294			44,350			5,974,543
Financial assets held for trading		1,378,674		39,724		—			—			—			—			1,418,398
Available-for-sale financial assets		34,293,488		3,567,314		62,315			150,914			—			85,994			38,160,025
Held-to-maturity financial assets		5,898		11,340		—			—			—			—			17,238
Loans		100,839,819		30,665,306		760,736			1,802,938			79,205			166,462			134,314,466
Derivative financial assets		3,860,104		995,400		39,640			8,864			—			8,784			4,912,792
Other assets		2,434,937		2,568,998		256,556			79,303			10,269			71,394			5,421,457
Total financial assets	W	144,129,263		42,398,041		1,124,138			2,099,725			90,768			376,984			190,218,919
Financial liabilities:
Financial liabilities designated at FVTPL	W	1,138,628		—		—			—			—			—			1,138,628
Deposits		31,932,943		5,230,164		35,575			406,094			73			865			37,605,714
Borrowings		9,851,886		11,507,929		705,425			1,466,261			—			6,030			23,537,531
Bonds		90,357,163		16,875,121		1,847,216			1,910,870			433,870			5,145,556			116,569,796
Derivative financial liabilities		3,818,699		897,559		38,599			30,417			—			3,880			4,789,154
Other liabilities		3,539,019		1,974,354		229,820			64,519			11,244			101,730			5,920,686
Total financial liabilities		140,638,338		36,485,127		2,856,635			3,878,161			445,187			5,258,061			189,561,509
Net financial position	W	3,490,925		5,912,914		(1,732,497	)		(1,778,436	)		(354,419	)		(4,881,077	)		657,410

145

Korea Development Bank

Notes to the Separate Financial Statements—(Continued)

For the years ended December 31, 2014 and 2013

(In millions of won)

	December 31, 2013
	KRW		USD		EUR			JPY			GBP		Others			Total
Financial assets:
Cash and due from banks	W	2,119,233		3,529,451		1,607			35,384			1,124		23,538			5,710,337
Financial assets held for trading		1,404,759		20,894		—			—			—		—			1,425,653
Available-for-sale financial assets		21,639,102		3,465,472		138,337			205,708			—		85,614			25,534,233
Held-to-maturity financial assets		27,109		—		—			—			—		—			27,109
Loans		66,851,650		26,240,730		528,628			2,415,978			19,424		252,003			96,308,413
Derivative financial assets		3,584,242		669,708		55,189			8,697			—		1,436			4,319,272
Other assets		2,190,361		1,735,274		62,896			138,133			—		12,811			4,139,475
Total financial assets	W	97,816,456		35,661,529		786,657			2,803,900			20,548		375,402			137,464,492
Financial liabilities:
Financial liabilities designated at FVTPL	W	677,916		—		—			—			—		—			677,916
Deposits		31,767,629		5,347,742		31,449			580,214			23		213			37,727,270
Borrowings		9,007,826		11,937,635		335,076			1,936,532			—		3,704			23,220,773
Bonds		36,876,366		12,133,924		2,236,678			1,003,595			—		3,674,305			55,924,868
Derivative financial liabilities		3,215,329		605,391		46,867			12,355			—		159			3,880,101
Other liabilities		3,128,124		1,254,518		34,999			524,533			3,481		36,858			4,982,513
Total financial liabilities		84,673,190		31,279,210		2,685,069			4,057,229			3,504		3,715,239			126,413,441
Net financial position	W	13,143,266		4,382,319		(1,898,412	)		(1,253,329	)		17,044		(3,339,837	)		11,051,051

(5) Liquidity risk management

(i) Concept

Liquidity risk is defined as the possibility of potential loss due to a temporary shortage in funds caused by a maturity mismatch or an unexpected capital outlay. Liquidity risk soars when funding rates rise, assets are sold below a normal price, or a good investment opportunity is missed.

146

Korea Development Bank

Notes to the Separate Financial Statements—(Continued)

For the years ended December 31, 2014 and 2013

(ii) Approach to liquidity risk management

Since the methodology to quantifiably measure liquidity risk does not formally exist, the Bank manages its liquidity risks as follows:

Allowable limit for liquidity risk

• The allowable limit for liquidity risk sets liquidity ratio and remaining maturity gap

• The management standards with regards to the allowable limit for liquidity risk should be set using separate and stringent set ratios in accordance with the FSS guidelines.

<Measurement Methodology>

• Liquidity ratio : (Maturing liquidity asset in the interval / Maturing liquidity liability in the interval) X 100

• Remaining maturity gap : (Maturing liquidity asset in the interval—Maturing liquidity liability in the interval) / total assets X 100

Early Warning Indicator

In order to identify prematurely and cope with worsening liquidity risk trends, the Bank has set up 13 indexes such as the “Foreign Exchange Stabilization Bond CDS Premium,” and measures the trend monthly, weekly and daily as a means for establishing the allowable liquidity risk limit complementary measures.

Stress-Test analysis and contingency plan

The Bank evaluates the effects on the liquidity risk and identifies the inherent flaws. In the case where an unpredictable and significant liquidity crisis occurs, the Bank executes risk situation analysis quarterly based on crisis specific to the Bank, market risk and complex emergency, and reports to the Risk Management Committee for the purpose of the Bank’s solvency securitization.

147

Korea Development Bank

Notes to the Separate Financial Statements—(Continued)

For the years ended December 31, 2014 and 2013

(In millions of won)

(iii) Analysis on remaining contractual maturity of financial instruments

Remaining contractual maturity risks of non-derivative financial instruments including interest payment as of December 31, 2014 and 2013 are as follows:

	December 31, 2014
	Within 1 month		1 ~ 3 months		3 ~ 12 months		1 ~ 5 years		Over 5 years		Total
Financial assets:
Cash and due from banks	W	4,885,386		317,448		436,954		250,801		105,064		5,995,653
Financial assets held for trading		1,418,398		—		—		—		—		1,418,398
Available-for-sale financial assets		370,345		4,201,999		7,980,954		15,502,215		11,838,387		39,893,900
Held-to-maturity financial assets		35		—		2,038		16,819		—		18,892
Loans		11,099,336		11,724,522		41,696,127		65,649,662		14,993,470		145,163,117
Other assets		3,220,682		—		—		—		7,174,423		10,395,105
Total financial asset	W	20,994,182		16,243,969		50,116,073		81,419,497		34,111,344		202,885,065
Financial liabilities:
Financial liabilities designated at FVTPL	W	—		—		318,061		335,726		1,122,980		1,776,767
Deposits		5,810,417		6,836,178		18,463,724		7,272,797		376,997		38,760,113
Borrowings		5,289,378		5,743,308		6,799,281		4,619,720		1,444,371		23,896,058
Bonds		3,833,701		7,764,941		29,405,642		68,274,544		17,332,918		126,611,746
Other liabilities		3,777,958		2,130,024		10,950		48,306		7,943,813		13,911,051
Total financial liabilities	W	18,711,454		22,474,451		54,997,658		80,551,093		28,221,079		204,955,735

148

Korea Development Bank

Notes to the Separate Financial Statements—(Continued)

For the years ended December 31, 2014 and 2013

(In millions of won)

	December 31, 2013
	Within 1 month		1 ~ 3 months		3 ~ 12 months		1 ~ 5 years		Over 5 years		Total
Financial assets:
Cash and due from banks	W	4,958,851		206,795		255,254		304,808		379		5,726,087
Financial assets held for trading		1,436,395		—		—		—		—		1,436,395
Available-for-sale financial assets		187,690		4,375,759		6,280,637		12,725,473		3,455,035		27,024,594
Held-to-maturity financial assets		290		17		21,886		9,069		—		31,262
Loans		10,165,962		10,578,681		31,023,490		41,609,722		10,246,540		103,624,395
Other assets		3,488,432		—		1,295		11,560		1,236,880		4,738,167
Total financial asset	W	20,237,620		15,161,252		37,582,562		54,660,632		14,938,834		142,580,900
Financial liabilities:
Financial liabilities designated at FVTPL	W	—		—		5,155		215,120		1,024,216		1,244,491
Deposits		12,728,291		6,311,823		19,004,697		726,971		97,323		38,869,105
Borrowings		4,782,025		3,551,858		8,544,509		5,429,467		1,459,190		23,767,049
Bonds		3,082,781		2,582,567		14,851,710		32,099,514		10,094,139		62,710,711
Other liabilities		3,412,590		310		9,019		35,875		2,346,279		5,804,073
Total financial liabilities	W	24,005,687		12,446,558		42,415,090		38,506,947		15,021,147		132,395,429

Remaining contractual maturity risks of derivative financial instruments as of December 31, 2014 and 2013 are as follows:

Net settlement of derivative financial instruments

	December 31, 2014
	Within 1 month			1 ~ 3 months			3 ~ 12 months			1 ~ 5 years			Over 5 years		Total
Trading purpose derivatives:
Currency	W	893			1,260			1,926			—			—		4,079
Interest rate		(3,795	)		(3,113	)		(48,398	)		(24,433	)		150,673		70,934
Stock		217			34			3			—			—		254
Hedging purpose derivatives:
Interest rate		9,658			132,619			100,586			746,674			3,816,007		4,805,544
	W	6,972			130,800			54,116			722,242			3,966,681		4,880,811

149

Korea Development Bank

Notes to the Separate Financial Statements—(Continued)

For the years ended December 31, 2014 and 2013

(In millions of won)

	December 31, 2013
	Within 1 month			1 ~ 3 months			3 ~ 12 months			1 ~ 5 years			Over 5 years			Total
Trading purpose derivatives:
Currency	W	(36,151	)		(72,308	)		(11,277	)		—			—			(119,736	)
Interest rate		2,193			185,839			146,451			369,453			1,543,637			2,247,573
Stock		—			(5,541	)		(3,225	)		(12,016	)		—			(20,782	)
Hedging purpose derivatives:
Interest rate		—			177,537			(10,651	)		(708,914	)		(111,157	)		(653,185	)
	W	(33,958	)		285,527			121,298			(351,477	)		1,432,480			1,453,870

Gross settlement of derivative instruments

	December 31, 2014
	Within 1 month		1 ~ 3 months		3 ~ 12 months		1 ~ 5 years		Over 5 years		Total
Trading purpose derivatives:
Currency
Inflow	W	12,935,380		12,999,424		37,026,139		33,702,490		1,348,906		98,012,339
Outflow		12,865,373		12,959,933		36,932,889		33,548,466		1,357,014		97,663,675
Hedging purpose derivatives:
Currency
Inflow		175,735		529,898		6,366,830		16,797,720		1,448,433		25,318,616
Outflow		181,838		564,432		6,593,476		17,191,962		1,432,264		25,963,972
Total inflow	W	13,111,115		13,529,322		43,392,969		50,500,210		2,797,339		123,330,955
Total outflow	W	13,047,211		13,524,365		43,526,365		50,740,428		2,789,278		123,627,647

	December 31, 2013
	Within 1 month		1 ~ 3 months		3 ~ 12 months		1 ~ 5 years		Over 5 years		Total
Trading purpose derivatives:
Currency
Inflow	W	10,176,000		7,606,397		15,909,252		9,917,810		245,199		43,854,658
Outflow		10,186,032		7,559,472		16,062,327		10,243,482		247,038		44,298,351
Hedging purpose derivatives:
Currency
Inflow		94,184		471,653		1,309,717		3,374,745		168,028		5,418,327
Outflow		96,143		471,782		1,283,639		3,461,882		168,377		5,481,823
Total inflow	W	10,270,184		8,078,050		17,218,969		13,292,555		413,227		49,272,985
Total outflow	W	10,282,175		8,031,254		17,345,966		13,705,364		415,415		49,780,174

150

Korea Development Bank

Notes to the Separate Financial Statements—(Continued)

For the years ended December 31, 2014 and 2013

(In millions of won)

Remaining contractual maturity risks of guarantees and commitments as of December 31, 2014 and 2013 are as follows:

	December 31, 2014
	Within 1 month		1 ~ 3 months		3 ~ 12 months		1 ~ 5 years		Over 5 years		Total
Off-Balance:
Guarantees	W	1,535,124		1,743,053		3,991,669		4,797,363		67,164		12,134,373
Commitments		525,607		27,480		1,083,979		3,013,767		2,491,440		7,142,273
	W	2,060,731		1,770,533		5,075,648		7,811,130		2,558,604		19,276,646
	December 31, 2013
	Within 1 month		1 ~ 3 months		3 ~ 12 months		1 ~ 5 years		Over 5 years		Total
Off-Balance:
Guarantees	W	564,006		1,177,969		2,443,375		3,059,609		4,533,099		11,778,058
Commitments		24,039		141,659		2,188,537		3,233,299		637,907		6,225,441
	W	588,045		1,319,628		4,631,912		6,292,908		5,171,006		18,003,499

151

THE REPUBLIC OF KOREA

Land and History

Territory and Population

Located generally south of the 38th parallel on the Korean peninsula, The Republic of Korea covers about 38,000 square miles, approximately one-fourth of which is arable. The Republic has a population of approximately 51 million people. The country’s largest city and capital, Seoul, has a population of about 10 million people.

Map of the Republic of Korea

Political History

Dr. Rhee Seungman, who was elected President in each of 1948, 1952, 1956 and 1960, dominated the years after the Republic’s founding in 1948. Shortly after President Rhee’s resignation in 1960 in response to student-led demonstrations, a group of military leaders headed by Park Chung Hee assumed power by coup. The military leaders established a civilian government, and the country elected Mr. Park as President in October 1963. President Park served as President until his assassination in 1979 following a period of increasing strife between the Government and its critics. The Government declared martial law and formed an interim government under

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Prime Minister Choi Kyu Hah, who became the next President. After clashes between the Government and its critics, President Choi resigned, and General Chun Doo Hwan, who took control of the Korean army, became President in 1980.

In late 1980, the country approved, by national referendum, a new Constitution, providing for indirect election of the President by an electoral college and for certain democratic reforms, and shortly thereafter, in early 1981, re-elected President Chun.

Responding to public demonstrations in 1987, the legislature revised the Constitution to provide for direct election of the President. In December 1987, Roh Tae Woo won the Presidency by a narrow plurality, after opposition parties led by Kim Young Sam and Kim Dae Jung failed to unite behind a single candidate. In February 1990, two opposition political parties, including the one led by Kim Young Sam, merged into President Roh’s ruling Democratic Liberal Party.

In December 1992, the country elected Kim Young Sam as President. The election of a civilian and former opposition party leader considerably lessened the controversy concerning the legitimacy of the political regime. President Kim’s administration reformed the political sector and deregulated and internationalized the Korean economy.

In December 1997, the country elected Kim Dae Jung as President. President Kim’s party, the Millennium Democratic Party (formerly known as the National Congress for New Politics), formed a coalition with the United Liberal Democrats led by Kim Jong Pil, with Kim Jong Pil becoming the first prime minister in President Kim’s administration. The coalition, which temporarily ended before the election held in April 2000, continued with the appointment of Lee Han Dong of the United Liberal Democrats as the Prime Minister in June 2000. The coalition again ended in September 2001.

In December 2002, the country elected Roh Moo Hyun as President. President Roh and his supporters left the Millennium Democratic Party in 2003 and formed a new party, the Uri Party, in November 2003. On August 15, 2007, 85 members of the National Assembly, previously belonging to the Uri Party, or the Democratic Party, formed the United New Democratic Party (the “UNDP”). The Uri Party merged into the UNDP in August 20, 2007. In February 2008, the UNDP merged back into the Democratic Party. In December 2011, the Democratic Party merged with the Citizens Unity Party to form the Democratic United Party, which changed its name to the Democratic Party in May 2013.

In December 2007, the country elected Lee Myung-Bak as President. He commenced his term on February 25, 2008. The Lee administration pursued a lively market economy through deregulation, free trade and the attraction of foreign investment.

In December 2012, the country elected Park Geun-hye as President. She commenced her term on February 25, 2013. The Park administration’s key policy priorities include:

• facilitating the growth of small and medium-enterprises and job creation;

• seeking a productive welfare system based on customized welfare benefits and job training;

• promoting clean and renewable energy technologies;

• facilitating new growth engine industries;

• taking initiatives on the denuclearization of North Korea; and

• establishing an efficient government by reorganizing government functions.

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Government and Politics

Government and Administrative Structure

Governmental authority in the Republic is centralized and concentrated in a strong Presidency. The President is elected by popular vote and can only serve one term of five years. The President chairs the State Council, which consists of the prime minister, the deputy prime ministers, the respective heads of Government ministries and the ministers of state. The President can select the members of the State Council and appoint or remove all other Government officials, except for elected local officials.

The President can veto new legislation and take emergency measures in cases of natural disaster, serious fiscal or economic crisis, state of war or other similar circumstances. The President must promptly seek the concurrence of the National Assembly for any emergency measures taken and failing to do so automatically invalidates the emergency measures. In the case of martial law, the President may declare martial law without the consent of the National Assembly; provided, however, that the National Assembly may request the President to rescind such martial law.

The National Assembly exercises the country’s legislative power. The Constitution and the Election for Public Offices Act provide for the direct election of about 82% of the members of the National Assembly and the distribution of the remaining seats proportionately among parties winning more than 5 seats in the direct election or receiving over 3% of the popular vote. National Assembly members serve four-year terms. The National Assembly enacts laws, ratifies treaties and approves the national budget. The executive branch drafts most legislation and submits it to the National Assembly for approval.

The country’s judicial branch comprises the Supreme Court, the Constitutional Court and lower courts of various levels. The President appoints the Chief Justice of the Supreme Court and appoints the other Justices of the Supreme Court upon the recommendation of the Chief Justice. All appointments to the Supreme Court require the consent of the National Assembly. The Chief Justice, with the consent of the conference of Supreme Court Justices, appoints all the other judges in Korea. Supreme Court Justices serve for six years and all other judges serve for ten years. Other than the Chief Justice, justices and judges may be reappointed to successive terms.

The President formally appoints all nine judges of the Constitutional Court, but three judges must be designated by the National Assembly and three by the Chief Justice of the Supreme Court. Constitutional Court judges serve for six years and may be reappointed to successive terms.

Administratively, the Republic comprises eight provinces, one special autonomous province (Jeju), one special city (Seoul), six metropolitan cities (Busan, Daegu, Incheon, Gwangju, Daejon and Ulsan) and one special autonomous city (Sejong). From 1961 to 1995, the national government controlled the provinces and the President appointed provincial officials. Local autonomy, including the election of provincial officials, was reintroduced in June 1995.

Political Organizations

The 19th legislative general election was held on April 11, 2012 and the term of the National Assembly members elected in the 19th legislative general election commenced on May 30, 2012. In March 2014, the Democratic Party merged with the New Politics Alliance and changed its name to the New Politics Alliance for Democracy, or the NPAD. Currently, there are two major political parties, the Saenuri Party (formerly known as the Grand National Party), or SP, to which President Park Geun-hye belongs, and the NPAD.

As of March 31, 2015, the parties control the following number of seats in the National Assembly:

	SP		NPAD		Others		Total
Number of Seats		157		130		7		294

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Relations with North Korea

Relations between the Republic and North Korea have been tense over most of the Republic’s history. The Korean War, which took place between 1950 and 1953 began with the invasion of the Republic by communist forces from North Korea and, following a military stalemate, an armistice was reached establishing a demilitarized zone monitored by the United Nations in the vicinity of the 38th parallel.

North Korea maintains a regular military force estimated at more than 1,000,000 troops, mostly concentrated near the northern border of the demilitarized zone. The Republic’s military forces, composed of approximately 650,000 regular troops and almost 3.0 million reserves, maintain a state of military preparedness along the southern border of the demilitarized zone. In addition, the United States has historically maintained its military presence in the Republic. In October 2004, the United States and the Republic agreed to a three-phase withdrawal of approximately one-third of the 37,500 troops stationed in the Republic by the end of 2008. By the end of 2004, 5,000 U.S. troops departed the Republic in the first phase of such withdrawal and in the plan’s second phase, the United States removed 5,000 troops by the end of 2006. In the final phase, another 2,500 U.S. troops were scheduled to depart by the end of 2008. In April 2008, however, the United States and the Republic decided not to proceed with the final phase of withdrawal and agreed to maintain 28,500 U.S. troops in the Republic. In February 2007, the United States and the Republic agreed to dissolve their joint command structure by 2012, which would allow the Republic to assume the command of its own armed forces in the event of war on the Korean peninsula. In June 2010, however, the United States and the Republic agreed to delay the dissolution of their joint command structure to 2015. In October 2014, the United States and the Republic further agreed to implement a conditions-based approach to the dissolution of their joint command structure at an appropriate future date.

The level of tension between the two Koreas has fluctuated and may increase abruptly as a result of current and future events. There have been heightened security concerns stemming from North Korea’s nuclear weapons and long-range missile programs and increased uncertainty regarding North Korea’s actions and possible responses from the international community. In December 2002, North Korea removed the seals and surveillance equipment from its Yongbyon nuclear power plant and evicted inspectors from the United Nations International Atomic Energy Agency. In January 2003, North Korea renounced its obligations under the Nuclear Non-Proliferation Treaty. Since the renouncement, the Republic, the United States, North Korea, China, Japan and Russia have held numerous rounds of six party multi-lateral talks in an effort to resolve issues relating to North Korea’s nuclear weapons program.

In addition to conducting test flights of long-range missiles, North Korea announced in October 2006 that it had successfully conducted a nuclear test, which increased tensions in the region and elicited strong objections worldwide. In response, the United Nations Security Council passed a resolution that prohibits any United Nations member state from conducting transactions with North Korea in connection with any large scale arms and material or technology related to missile development or weapons of mass destruction and from providing luxury goods to North Korea, imposes an asset freeze and travel ban on persons associated with North Korea’s weapons program, and calls upon all United Nations member states to take cooperative action, including thorough inspection of cargo to or from North Korea. In response, North Korea agreed in February 2007 at the six-party talks to shut down and seal the Yongbyon nuclear facility, including the reprocessing facility, and readmit international inspectors to conduct all necessary monitoring and verifications.

In April 2009, North Korea launched a long-range rocket over the Pacific Ocean. The Republic, Japan and the United States responded that the launch poses a threat to neighboring nations and that it was in violation of the United Nations Security Council resolution adopted in 2006 against nuclear tests by North Korea, and the United Nations Security Council unanimously passed a resolution that condemned North Korea for the launch and decided to tighten sanctions against North Korea. Subsequently, North Korea announced that it would permanently pull out of the six-party talks and restart its nuclear program, and the International Atomic Energy Agency reported that its inspectors had been ordered to remove surveillance devices and other equipment at the

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Yongbyon nuclear power plant and to leave North Korea. In May 2009, North Korea announced that it had successfully conducted a second nuclear test and test-fired three short-range, surface-to-air missiles. In response, the United Nations Security Council unanimously passed a resolution that condemned North Korea for the nuclear test and decided to expand and tighten sanctions against North Korea. In March 2010, a Korean warship was destroyed by an underwater explosion, killing many of the crewmen on board. The Government formally accused North Korea of causing the sinking in May 2010. North Korea denied responsibility for the sinking and threatened retaliation for any attempt to punish it for the act. In November 2010, North Korean forces fired more than one hundred artillery shells targeting Yeonpyeong Island located near the maritime border between the Republic and North Korea on the west coast of the Korean peninsula, killing two Korean soldiers and two civilians as well as causing substantial property damage. The Republic responded by firing approximately 80 artillery shells and putting the military on its highest alert level. The Government condemned North Korea for the act and vowed stern retaliation should there be further provocation. In April 2012, North Korea launched a long-range rocket over the Yellow Sea. The Republic, Japan and the United States condemned the launch and the United Nations Security Council adopted a chairman’s statement condemning North Korea for the launch. In December 2012, North Korea successfully launched a satellite into orbit using a long-range rocket after an unsuccessful attempt in April 2012, despite concerns in the international community that such a launch would be in violation of the United Nations Security Council resolutions that prohibit North Korea from conducting launches that use ballistic missile technology. In February 2013, North Korea announced that it had successfully conducted a third nuclear test, which increased tensions in the region. In response, the United Nations Security Council strongly condemned North Korea for the nuclear test. In March 2013, North Korea stated that it had entered “a state of war” with the Republic, declaring the 1953 armistice invalid, and put its artillery at the highest level of combat readiness to protest the Republic-United States allies’ military drills and additional sanctions imposed on North Korea for its missile and nuclear tests. In April 2013, North Korea blocked access to the inter-Korean industrial complex in its border city of Gaeseong to South Koreans, while the U.S. deployed nuclear-capable stealth bombers and destroyers to Korean air and sea space. From time to time, North Korea has also fired short to medium range missiles from the coast of the Korean peninsula into the sea. Most recently in March 2015, North Korea fired seven surface-to-air missiles into waters off its east coast in apparent protest of annual joint military exercises being held by the Republic and the United States.

In addition, North Korea’s economy faces severe challenges including chronic food shortages. In November 2009, the North Korean government redenominated its currency at a ratio of 100 to 1 as part of a currency reform undertaken in an attempt to control inflation and reduce income gaps. In tandem with the currency redenomination, the North Korean government banned the use or possession of foreign currency by its residents and closed down privately run markets, which led to severe inflation and food shortages. Such developments may further aggravate social and political tensions within North Korea.

Since the death of Kim Jong-il, the former North Korean ruler, in mid-December 2011, there has been increased uncertainty with respect to the future of North Korea’s political leadership and concern regarding its implications for political and economic stability in the region. Although Kim Jong-eun, Kim Jong-il’s third son, assumed power as North Korea’s new ruler, the eventual outcome of the leadership transition remains uncertain. Furthermore, as only limited information is available outside of North Korea about Kim Jong-eun, and it is unclear which individuals or factions, if any, will share political power with Kim Jong-eun or assume the leadership if the transition is not successful, there is significant uncertainty regarding the policies, actions and initiatives that North Korea might pursue in the future.

There can be no assurance that the level of tension on the Korean peninsula will not escalate in the future or that such escalation will not have a material adverse impact on the Republic’s economy or its ability to obtain future funding. Any further increase in tension, which may occur, for example, if North Korea experiences a leadership crisis, high-level contacts between the Republic and North Korea break down or military hostilities occur, could have a material adverse effect on the Republic’s economy.

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Over the longer term, reunification of the two Koreas could occur. Reunification may entail a significant economic commitment by the Republic. In former President Lee’s national address in August 2010, he suggested the possible adoption of a reunification tax as a potential means of alleviating the potential long-term economic burden associated with reunification. Such discussions on reunification are very preliminary, and it has not been decided whether or when such a reunification tax would be implemented. If a reunification tax is implemented, depending on how it is structured, it may lead to a decrease in domestic consumption, which in turn may have a material adverse effect on the Republic’s economy.

Foreign Relations and International Organizations

The Republic maintains diplomatic relations with most nations of the world, most importantly with the United States with which it entered into a mutual defense treaty and several economic agreements. The Republic also has important relationships with Japan and China, its largest trading partners together with the United States.

The Republic belongs to a number of supranational organizations, including:

• the International Monetary Fund, or the IMF;

• the World Bank;

• the Asian Development Bank, or ADB;

• the Multilateral Investment Guarantee Agency;

• the International Finance Corporation;

• the International Development Association;

• the African Development Bank;

• the European Bank for Reconstruction and Development;

• the Bank for International Settlements;

• the World Trade Organization, or WTO; and

• the Inter-American Development Bank, or IDB.

In September 1991, the Republic and North Korea became members of the United Nations. During the 1996 and 1997 sessions, the Republic served as a non-permanent member of the United Nations Security Council.

In March 1995, the Republic applied for admission to the Organization for Economic Cooperation and Development, or the OECD, which the Republic officially joined as the twenty-ninth regular member in December 1996.

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The Economy

The following table sets forth information regarding certain of the Republic’s key economic indicators for the periods indicated.

	As of or for the year ended December 31,
	2010			2011			2012			2013			2014
	(billions of dollars and trillions of Won, except percentages)
GDP Growth (at current prices)		9.9	%		5.3	%		3.4	%		3.8	%		3.9	%
GDP Growth (at chained 2010 year prices)		6.5	%		3.7	%		2.3	%		2.9	%		3.3	%
Inflation		3.0	%		4.0	%		2.2	%		1.3	%		1.3	%
Unemployment(1)		3.7	%		3.4	%		3.2	%		3.1	%		3.5	%
Trade Surplus(2)	$	41.2		$	30.8		$	28.3		$	44.0		$	47.2
Foreign Currency Reserves	$	291.6		$	306.4		$	327.0		$	346.5		$	363.6
External Liabilities(3)	$	355.9		$	400.0		$	408.9		$	416.1		$	N/A	(6)
Fiscal Balance	W	16.7		W	18.6		W	18.5		W	14.2		W	N/A	(6)
Direct Internal Debt of the Government(4) (as % of GDP(5))		28.5	%		29.7	%		30.9	%		32.8	%		N/A	(6)
Direct External Debt of the Government(4) (as % of GDP(5))		0.8	%		0.7	%		0.6	%		0.6	%		N/A	(6)

(1) Average for year.

(2) Derived from customs clearance statistics on a C.I.F. basis, meaning that the price of goods include insurance and freight cost.

(3) Calculated under the criteria based on the sixth edition of Balance of Payment Manual, or BPM6, published by the International Monetary Fund in December 2010.

(4) Does not include guarantees by the Government. See “—Debt—External and Internal Debt of the Government—Guarantees by the Government” for information on outstanding guarantees by the Government.

(5) At chained 2010 year prices.

(6) Not available.

Source: The Bank of Korea

Current Worldwide Economic and Financial Difficulties

In recent years, adverse conditions and volatility in the worldwide financial markets, fluctuations in oil and commodity prices and the general weakness of the U.S. and global economy have contributed to the uncertainty of global economic prospects in general and have adversely affected, and may continue to adversely affect, the Korean economy.

As liquidity and credit concerns and volatility in the global financial markets increased significantly since September 2008, the value of the Won relative to the U.S. dollar depreciated at an accelerated rate during the fourth quarter of 2008 and first half of 2009. See “Monetary Policy—Foreign Exchange.” Such depreciation of the Won increased the cost of imported goods and services and the Won revenue needed by Korean companies to service foreign currency-denominated debt. Furthermore, as a result of adverse global and Korean economic conditions, there was a significant overall decline and continuing volatility in the stock prices of Korean companies. The Korea Composite Stock Price Index declined by 27.8% from 1,852.0 on May 30, 2008 to 1,336.7 on April 16, 2009. See “The Financial System—Securities Markets”. Moreover, gross domestic product, or GDP, in the first quarter of 2009 contracted by 4.3% at chained 2005 year prices compared with the same period in 2008, and exports in the first quarter of 2009 decreased by 24.8% to US$74.7 billion from US$99.4 billion in the same period in 2008. In addition, increases in credit spreads, as well as limitations on the availability of credit resulting from heightened concerns about the stability of the markets generally and the strength of counterparties specifically that led many lenders and institutional investors to reduce or cease funding to borrowers, adversely affected Korean banks’ ability to borrow, particularly with respect to foreign currency funding, in the fourth quarter of 2008 and first half of 2009.

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In response to these developments, legislators and financial regulators in the United States and other jurisdictions, including Korea, implemented a number of policy measures designed to add stability to the financial markets, including the provision of direct and indirect assistance to distressed financial institutions. In particular, the Government implemented, among other things, the following measures in the fourth quarter of 2008 and in 2009:

• in October 2008, the Government implemented a guarantee program to guarantee foreign currency-denominated debt incurred by Korean banks and their overseas branches between October 20, 2008 and June 30, 2009 (subsequently extended to December 31, 2009), up to an aggregate amount of US$100 billion, for a period of three years (subsequently extended to five years) from the date such debt was incurred;

• in October 2008, The Bank of Korea established a temporary reciprocal currency swap arrangement with the Federal Reserve Board of the United States for up to US$30 billion, effective until April 30, 2009 (subsequently extended to October 30, 2009). The Bank of Korea provided U.S. dollar liquidity, through competitive auction facilities, to financial institutions established in Korea, using funds from the swap line;

• in December 2008, a W10 trillion bond market stabilization fund was established to purchase financial and corporate bonds and debentures in order to provide liquidity to companies and financial institutions;

• in December 2008, The Bank of Korea agreed with the People’s Bank of China to establish a bilateral currency swap arrangement for up to W38 trillion, effective for three years, and agreed with the Bank of Japan to increase the maximum amount of their bilateral swap arrangement from US$3 billion to US$20 billion, effective until April 30, 2009;

• in December 2008 and March 2009, the Government, through Korea Asset Management Corporation, purchased approximately W1.7 trillion of non-performing loans held by savings banks;

• during the first quarter of 2009, the Government, through the Bank of Korea and the Korea Development Bank, purchased from Korean banks approximately W4 trillion of hybrid securities and subordinated bonds;

• during the fourth quarter of 2008 and the first quarter of 2009, The Bank of Korea decreased the policy rate by a total of 3.25% points to 2.00% in order to address financial market instability and to help combat the slowdown of the domestic economy;

• in April 2009, the National Assembly authorized the expansion of the 2009 national budget by W28.4 trillion to provide stimulus for the Korean economy; and

• in December 2009, the Government, together with the member countries of the Association of Southeast Asian Nations, China and Japan, signed the Chiang Mai Initiative Multilateralization Agreement to address balance-of-payments and short-term liquidity difficulties in the region and to supplement the existing international financial arrangements.

The global financial markets have experienced significant volatility in recent years as a result of, among other things, the downgrading by Standard & Poor’s Rating Services of the long-term sovereign credit rating of the United States to “AA+” from “AAA” in August 2011, as well as the continuing financial difficulties affecting many other governments worldwide, including Greece, Spain, Italy and Portugal. In November 2009, the Dubai government announced a moratorium on the outstanding debt of Dubai World, a government-affiliated investment company. In November 2008, the Icelandic government, facing mounting debt problems, reached an agreement with the IMF to receive loans in the amount of US$2.1 billion over a two-year period, and in May 2010 and March 2012, the Greek government reached an agreement with the IMF and the European Union to receive loans in the amount of Euro 110 billion over a three-year period and to receive additional loans in the amount of Euro 130 billion over a four-year period, respectively. In July 2012, the Spanish government reached an agreement with the European Union under the European Stability Mechanism, or ESM, to receive up to Euro 100 billion to cover the capitalization needs of the Spanish banking sector. In connection with the

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agreement with the Spanish government, the ESM disbursed Euro 37 billion and Euro 1.9 billion in December 2012 and February 2013, respectively, for the recapitalization of certain Spanish banks. Any of these or other developments could potentially trigger another financial and economic crisis, which could have a material adverse effect on the Korean economy and financial markets (including depreciation of the value of the Won, decline and volatility in the stock prices of Korean companies, increases in credit spreads and funding costs and decreases in exports).

There has been significant volatility in the Korea Composite Stock Index in recent years, due to adverse global financial and economic conditions. See “—The Financial System—Securities Markets”. There is no guarantee that the stock prices of Korean companies will not decline again in the future. Future declines in the index and large amounts of sales of Korean securities by foreign investors and subsequent repatriation of the proceeds of such sales may continue to adversely affect the value of the Won, the foreign currency reserves held by financial institutions in Korea, and the ability of Korean companies and banks to raise capital. In the event that such difficult conditions in the global credit markets continue or the global economy deteriorates in the future, the Korean economy could be adversely affected and Korean banks may be forced to fund their operations at a higher cost or may be unable to raise as much funding as they need to support their lending and other activities.

Furthermore, while many governments worldwide are considering or are in the process of implementing “exit strategies”, in the form of reduced government spending, higher interest rates or otherwise, with respect to the economic stimulus measures adopted in response to the global financial crisis, such strategies may, for reasons related to timing, magnitude or other factors, have the unintended consequence of prolonging or worsening global economic and financial difficulties.

Any of the foregoing global developments may have a material adverse effect on the Korean economy. In addition, domestic developments that could lead or contribute to a material adverse effect on the Korean economy include, among other things, the following:

• steadily rising household debt consisting of housing loans and merchandise credit, which increased to W1,089.0 trillion as of December 31, 2014 from W843.2 trillion as of December 31, 2010, primarily due to increases in mortgage loans and purchases with credit cards;

• a slowdown in consumer spending and depressed consumer sentiment, due in part to a decrease in consumer spending following the sinking of the Sewol passenger ferry in April 2014 that led to the death of hundreds of passengers;

• a decrease in tax revenue and a substantial increase in the Korean government’s expenditures for pension and social welfare programs, due in part to an aging population (defined as the population of people aged 65 years or older) that accounts for 12.7% of the Republic’s total population as of December 31, 2014, an increase from 7.2% as of December 31, 2000, and is expected to surpass 15% in 2020 and 20% in 2026, which could lead to the Korean government’s budget deficit;

• increasing delinquencies and credit defaults by consumer and small- and medium-sized enterprise borrowers;

• decreases in the market prices of Korean real estate; and

• the occurrence of severe health epidemics, including epidemics that affect the livestock industry.

Gross Domestic Product

GDP measures the market value of all final goods and services produced within a country for a given period and reveals whether a country’s productive output rises or falls over time. Economists present GDP in both current market prices and “real” or “inflation-adjusted” terms. In March 2009, the Republic adopted a method known as the “chain-linked” measure of GDP, replacing the previous fixed-base, or “constant” measure of GDP, to show the real growth of the aggregate economic activity, as recommended by the System of National Accounts 1993. GDP at current market prices values a country’s output using the actual prices of each year, whereas the

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“chain-linked” measure of GDP is compiled by using “chained indices” linking volume growth between consecutive time periods. In March 2014, the Republic published a revised GDP calculation method by implementing the System of National Accounts 2008 and updating the reference year from 2005 to 2010 to align Korean national accounts statistics with the recommendations of the new international standards for compiling national economic accounts and to maintain comparability with other nations’ accounts. The main components of these revisions include, among other things, (i) recognizing expenditures for research and development and creative activity for the products of entertainment, literary and artistic originals as fixed investment, (ii) incorporating a wide array of new and revised source data such as the economic census, the population and housing census and 2010 benchmark input-output tables, which provide thorough and detailed information on the structure of the Korean economy, (iii) developing supply-use tables, which provide a statistical tool for ensuring consistency among the production, expenditure and income approaches to measuring GDP and (iv) recording merchandise trade transactions based on ownership changes rather than movements of goods across the national frontier.

The following table sets out the composition of the Republic’s GDP at current market and chained 2010 year prices and the annual average increase in the Republic’s GDP.

Gross Domestic Product

	2010			2011			2012			2013			2014(1)			As % of GDP 2014(1)
	(billions of Won)
Gross Domestic Product at Current Market Prices:
Private		636,712.7			679,141.5			707,614.0			727,799.9			748,906.5			50.4
Government		183,108.5			194,381.2			204,324.2			214,467.3			224,045.2			15.1
Gross Capital Formation		405,188.0			439,236.1			427,028.5			416,000.3			433,068.9			29.2
Exports of Goods and Services		625,308.8			742,936.0			776,062.4			770,114.8			752,061.8			50.6
Less Imports of Goods and Services		(585,010.0	)		(723,013.8	)		(737,572.4	)		(698,936.9	)		(672,822.1	)		(45.3	)
Statistical Discrepancy		—			—			—			—			(182.4	)		(0.0	)
Expenditures on Gross Domestic Product		1,265,308.0			1,332,681.0			1,377,456.7			1,429,445.4			1,485,078.0			100.0
Net Factor Income from the Rest of the World		1,271.9			7,848.8			14,138.8			10,199.0			11,515.4			0.8
Gross National Income(2)		1,266,579.8			1,340,529.8			1,391,595.5			1,439,644.4			1,496,593.4			100.8
Gross Domestic Product at Chained 2010 Year Prices:
Private		636,712.7			655,181.1			667,781.2			680,349.5			692,594.0			48.6
Government		183,108.5			187,158.2			193,473.5			199,783.4			205,417.7			14.4
Gross Capital Formation		405,188.0			419,282.7			409,639.9			409,153.8			429,714.9			30.1
Exports of Goods and Services		625,308.8			719,943.2			756,558.4			788,788.0			810,723.2			56.8
Less Imports of Goods and Services		(585,010.0	)		(668,931.5	)		(685,009.4	)		(696,724.6	)		(711,437.3	)		(49.9	)
Statistical Discrepancy		—			(740.9	)		(142.1	)		(172.8	)		409.1			0.0
Expenditures on Gross Domestic Product(3)		1,265,308.0			1,311,892.7			1,341,966.5			1,380,832.6			1,426,540.3			100.0
Net Factor Income from the Rest of the World in the Terms of Trade		1,271.9			7,573.1			13,577.8			10,037.5			11,255.7			0.8
Trading Gains and Losses from Changes in the Terms of Trade		—			(32,183.6	)		(33,075.1	)		(19,138.8	)		(13,984.6	)		(1.0	)
Gross National Income(4)		1,266,579.8			1,287,282.2			1,322,449.9			1,371,733.1			1,423,790.2			99.8
Percentage Increase (Decrease) of GDP over Previous Year At Current Prices		9.9			5.3			3.4			3.8			3.9
At Chained 2010 Year Prices		6.5			3.7			2.3			2.9			3.3

(1) Preliminary.

(2) GDP plus net factor income from the rest of the world is equal to the Republic’s gross national product.

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(3) Under the “chain-linked” measure of GDP, the components of GDP will not necessarily add to the total GDP.

(4) Under the “chain-linked” measure of Gross National Income, the components of Gross National Income will not necessarily add to the total Gross National Income.

Source: The Bank of Korea.

The following table sets out the Republic’s GDP by economic sector at current market prices:

Gross Domestic Product by Economic Sector

(at current market prices)

	2010		2011		2012		2013		2014(1)		As % of GDP 2013(1)
	(billions of Won)
Industrial Sectors:
Agriculture, Forestry and Fisheries		28,297.4		30,454.0		30,775.1		30,437.2		31,710.3		2.1
Mining and Manufacturing		353,969.9		381,808.0		390,288.6		406,127.7		412,732.5		27.8
Mining and Quarrying		2,199.3		2,287.0		2,278.5		2,471.0		2,518.3		0.2
Manufacturing		351,770.6		379,521.0		388,010.1		403,656.7		410,214.2		27.6
Electricity, Gas and Water Supply		25,632.3		23,994.1		26,178.2		30,238.7		38,114.8		2.6
Construction		58,633.7		58,587.3		59,959.4		64,250.5		66,954.8		4.5
Services:		678,590.8		715,112.9		744,253.9		772,184.1		804,774.1		54.2
Wholesale and Retail Trade, Restaurants and Hotels		130,351.2		140,705.3		146,807.7		150,251.9		152,118.1		10.2
Transportation and Storage		44,539.1		42,458.7		43,570.7		46,772.0		50,190.1		3.4
Finance and Insurance		71,669.6		77,872.6		75,808.5		72,478.1		75,557.6		5.1
Real Estate and Leasing		91,042.0		94,716.1		98,923.6		103,527.1		108,004.5		7.3
Information and Communication		45,364.1		46,827.0		48,774.2		50,589.2		52,079.0		3.5
Business Activities		77,950.1		83,277.4		88,828.1		94,758.4		99,799.3		6.7
Public Administration and Defense		78,885.9		83,290.8		88,654.6		93,776.3		98,279.6		6.6
Education		63,749.4		66,559.6		68,546.3		71,599.3		74,294.1		5.0
Health and Social Work		43,925.1		46,656.1		50,031.3		52,851.5		57,178.3		3.9
Cultural and Other Services		31,114.5		32,749.4		34,309.0		35,580.3		37,273.5		2.5
Taxes Less Subsidies on Products		120,183.9		122,724.8		126,001.4		126,207.2		130,791.5		8.8
Gross Domestic Product at Current Market Prices		1,265,308.0		1,332,681.0		1,377,456.7		1,429,445.4		1,485,078.0		100.0
Net Factor Income from the Rest of the World		1,271.9		7,848.8		14,138.8		10,199.0		11,515.4		0.8
Gross National Income at Current Market Price		1,266,579.8		1,340,529.8		1,391,595.5		1,439,644.4		1,496,593.4		100.8

(1) Preliminary.

Source: The Bank of Korea.

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The following table sets out the Republic’s GDP per capita:

Gross Domestic Product per capita

(at current market prices)

	2010		2011		2012		2013		2014(1)
GDP per capita (thousands of Won)		25,608		26,772		27,547		28,464		29,452
GDP per capita (U.S. dollar)		22,147		24,160		24,445		25,993		27,964
Average Exchange Rate (in Won per U.S. dollar)		1,156.3		1,108.1		1,126.9		1,095.0		1,053.2

(1) Preliminary.

Source: The Bank of Korea.

The following table sets out the Republic’s Gross National Income, or GNI, per capita:

Gross National Income per capita

(at current market prices)

	2010		2011		2012		2013		2014(1)
GNI per capita (thousands of Won)		25,634		26,929		27,829		28,667		29,680
GNI per capita (U.S. dollar)		22,170		24,302		24,696		26,179		28,180
Average Exchange Rate (in Won per U.S. dollar)		1,156.3		1,108.1		1,126.9		1,095.0		1,053.2

(1) Preliminary.

Source: The Bank of Korea.

The following table sets out the Republic’s GDP by economic sector at chained 2010 year prices:

Gross Domestic Product by Economic Sector

(at chained 2010 year prices)

	2010		2011		2012		2013		2014(1)		As % of GDP 2014(1)
	(billions of Won)
Industrial Sectors:
Agriculture, Forestry and Fisheries		28,297.4		27,744.6		27,506.9		28,357.7		29,086.8		2.0
Mining and Manufacturing		353,969.9		376,958.3		385,853.1		399,73.1		415,513.0		29.1
Mining and Quarrying		2,199.3		2,176.3		2,170.5		2,347.1		2,343.1		0.2
Manufacturing		351,770.6		374,782.0		383,682.6		397,426.0		413,169.9		29.0
Electricity, Gas and Water Supply		25,632.3		25,687.4		26,710.3		26,629.2		27,220.5		1.9
Construction		58,633.7		55,432.2		54,430.5		56,044.1		56,369.4		4.0
Services:		678,590.8		699,580.8		718,906.2		739,463.1		762,553.9		53.5
Wholesale and Retail Trade, Restaurants and Hotels		130,351.2		137,058.1		141,698.2		145,620.3		149,258.4		10.5
Transportation and Storage		44,539.1		46,157.9		46,877.6		47,556.1		48,713.4		3.4
Finance and Insurance		71,669.6		72,741.3		75,547.3		78,583.9		83,067.2		5.8
Real Estate and Leasing		91,042.0		93,383.7		93,182.9		93,999.5		95,726.9		6.7
Information and Communication		45,364.1		47,931.6		50,199.3		52,773.2		54,432.7		3.8
Business Activities		77,950.1		80,913.7		83,352.8		87,244.6		90,794.2		6.4
Public Administration and Defense		78,885.9		80,639.1		82,940.5		85,024.5		87,133.4		6.1
Education		63,749.4		63,806.6		64,386.6		64,773.0		65,211.2		4.6
Health and Social Work		43,925.1		45,483.3		48,693.4		51,247.1		55,071.1		3.9
Cultural and Other Services		31,114.5		31,465.5		31,972.6		32,683.2		33,586.1		2.4
Taxes Less Subsidies on Products		120,183.9		126,489.5		128,708.4		130,627.4		136,207.0		9.5
Gross Domestic Product at Chained 2010 Year Prices(2)		1,265,308.0		1,311,892.7		1,341,966.5		1,380,832.6		1,426,540.3		100.0

(1) Preliminary.

(2) Under the “chain-linked” measure of GDP, the components of GDP will not necessarily add to the total GDP.

Source: The Bank of Korea.

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GDP growth in 2010 was 6.5% at chained 2010 year prices, as aggregate private and general government consumption expenditures increased by 4.3%, exports of goods and services increased by 12.7% and gross domestic fixed capital formation increased by 5.5%, each compared with 2009.

GDP growth in 2011 was 3.7% at chained 2010 year prices, as aggregate private and general government consumption expenditures increased by 2.7%, exports of goods and services increased by 15.1% and gross domestic fixed capital formation increased by 0.8%, each compared with 2010.

GDP growth in 2012 was 2.3% at chained 2010 year prices, as aggregate private and general government consumption expenditures increased by 2.2% and exports of goods and services increased by 5.1%, which more than offset a decrease in gross domestic fixed capital formation by 0.5%, each compared with 2011.

GDP growth in 2013 was 2.9% at chained 2010 year prices, as aggregate private and general government consumption expenditures increased by 2.2%, exports of goods and services increased by 4.3% and gross domestic fixed capital formation increased by 3.3%, each compared with 2012.

Based on preliminary data, GDP growth in 2014 was 3.3% at chained 2010 year prices, as aggregate private and general government consumption expenditures increased by 2.0%, exports of goods and services increased by 2.8% and gross domestic fixed capital formation increased by 3.1%, each compared with 2013.

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Principal Sectors of the Economy

Industrial Sectors

The following table sets out production indices for the principal industrial products of the Republic and their relative contribution to total industrial production:

Industrial Production

(2010 = 100)

	Index Weight(1)		2009		2010		2011		2012		2013(2)
All Industries		10,000.0		86.0		100.0		106.0		107.4		107.8
Mining and Manufacturing		9,611.6		85.7		100.0		106.0		107.5		107.8
Mining		33.9		107.8		100.0		104.5		99.8		104.1
Petroleum, Crude Petroleum and Natural Gas		8.7		102.1		100.0		91.6		90.2		86.2
Metal Ores		0.9		55.2		100.0		124.9		108.5		98.4
Non-metallic Minerals		24.3		112.6		100.0		108.4		102.9		110.7
Manufacturing		9,577.7		85.7		100.0		106.0		107.5		107.8
Food Products		434.4		94.3		100.0		101.9		103.4		103.4
Beverage Products		82.4		95.1		100.0		103.5		108.2		108.3
Tobacco Products		43.2		103.6		100.0		101.6		105.6		96.5
Textiles		160.6		89.2		100.0		101.5		99.1		97.4
Wearing Apparel, Clothing Accessories and Fur Articles		145.2		95.2		100.0		100.6		97.9		93.2
Tanning and Dressing of Leather, Luggage and Footwear		42.1		105.3		100.0		101.1		98.2		108.4
Wood and Products of Wood and Cork (Except Furniture)		31.7		101.1		100.0		97.5		87.9		93.5
Pulp, Paper and Paper Products		126.8		93.7		100.0		102.3		102.7		104.6
Printing and Reproduction of Recorded Media		50.2		87.5		100.0		91.8		90.5		86.5
Coke, hard-coal and lignite fuel briquettes and Refined Petroleum Products		471.0		96.7		100.0		106.9		109.1		104.6
Chemicals and Chemical Products		847.5		92.5		100.0		102.7		106.6		110.5
Pharmaceuticals, Medicinal Chemicals and Botanical Products		144.1		95.9		100.0		100.3		101.2		104.2
Rubber and Plastic Products		421.1		89.1		100.0		105.1		106.4		108.8
Non-metallic Minerals		271.7		94.8		100.0		100.3		95.2		98.6
Basic Metals		827.6		83.3		100.0		106.2		106.8		105.9
Fabricated Metal Products		557.8		92.2		100.0		108.9		117.9		116.1
Electronic Components, Computer, Radio, Television and Communication Equipment and Apparatuses		1,794.3		79.9		100.0		107.1		109.7		113.5
Medical, Precision and Optical Instruments, Watches and Clocks		148.1		89.4		100.0		105.6		111.6		123.5
Electrical Equipment		479.5		90.9		100.0		100.8		98.8		96.4
Other Machinery and Equipment		803.6		72.2		100.0		109.3		107.0		102.2
Motor Vehicles, Trailers and Semitrailers		1,076.4		81.2		100.0		114.7		114.5		115.9
Other Transport Equipment		506.5		107.4		100.0		101.7		107.1		101.6
Furniture		69.5		94.7		100.0		105.4		98.2		96.9
Other Products		42.4		86.7		100.0		102.2		103.8		102.9
Electricity, Gas		388.4		91.3		100.0		104.5		106.4		106.9
Total Index		10,000.0		86.0		100.0		106.0		107.4		107.8

(1) Index weights were established on the basis of an industrial census in 2010 and reflect the average annual value added by production in each of the classifications shown, expressed as a percentage of total value added in the mining, manufacturing and electricity and gas industries in that year.

(2) Preliminary.

Source: The Bank of Korea; Korea National Statistical Office.

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Industrial production decreased by 0.1% in 2009, primarily due to decreased exports as a result of adverse global economic conditions beginning in the second half of 2008. Industrial production increased by 16.3% in 2010, primarily due to increased exports and domestic consumption. Industrial production increased by 6.0% in 2011, primarily due to increased exports and domestic consumption. Industrial production increased by 1.3% in 2012, primarily due to increased domestic consumption. Based on preliminary data, industrial production increased by 0.4% in 2013, primarily due to increased exports.

Manufacturing

In 2009, the manufacturing sector decreased production by 0.2%, primarily due to adverse global economic conditions. The manufacturing sector increased production by 16.7% in 2010, primarily due to the recovery of domestic and global demand for automobiles, mobile phones and consumer electronics products, by 6.0% in 2011, primarily due to increased domestic consumption and exports, and by 1.4% in 2012, primarily due to increased demand for consumer electronics products, electronic equipment and chemical products. Based on preliminary data, the manufacturing sector increased production by 0.3% in 2013, primarily due to increased demand for consumer electronics products, electronic equipment, chemical products, medical equipment and transport equipment.

Automobiles. In 2009, automobile production decreased by 8.2%, domestic sales volume recorded an increase of 20.7% and export sales volume recorded a decrease of 19.9%, compared with 2008, primarily due to the continued decrease in global demand for automobiles. In 2009, export sales of automobiles constituted approximately 6.2% of the Republic’s total exports. The automobile stimulus programs of a number of governments, including those in the United States and Europe, encouraged demand for automobiles in the relevant countries for the first nine months of 2009, the effect of which partially offset the decrease in global demand for Korean automobiles during the duration of such stimulus programs. In the fourth quarter of 2009, export sales of automobiles increased compared to previous quarters of 2009, primarily due to the recovery of global demand for automobiles, the effect of which more than offset the negative impact of termination of most of such governments’ automobile stimulus programs in the second half of 2009. In 2010, automobile production increased by 21.6%, domestic sales volume recorded an increase of 5.1% and export sales volume recorded an increase of 29.0%, compared with 2009, primarily due to the recovery of global demand for automobiles. In 2011, automobile production increased by 9.0%, domestic sales volume recorded an increase of 0.6% and export sales volume recorded an increase of 13.7%, compared with 2010, primarily due to increased demand for automobiles in the United States, Brazil, Russia and China. In 2012, automobile production decreased by 2.1%, domestic sales volume recorded a decrease of 4.3% and export sales volume recorded an increase of 0.6%, compared with 2011, primarily due to decreased domestic demand for automobiles. Based on preliminary data, in 2013, automobile production decreased by 0.9%, domestic sales volume recorded a decrease of 1.9% and export sales volume recorded a decrease of 2.6%, compared with 2012, primarily due to decreased supply of automobiles resulting mainly from partial strikes by unionized workers of automobile manufacturers in August 2013 and the appreciation of the Won against the US dollar and the Japanese Yen.

Electronics. In 2009, electronics production amounted to W338,558 billion, an increase of 6.8% from the previous year, primarily due to an increase in domestic demand for mobile phones, and exports amounted to US$120.9 billion, a decrease of 7.8% from the previous year, primarily due to a decrease in global demand for consumer electronics products. In 2009, export sales of semiconductor memory chips constituted approximately 8.5% of the Republic’s total exports. In 2010, electronics production amounted to W400,092 billion, an increase of 18.1% from the previous year, and exports amounted to US$153.9 billion, an increase of 27.3% from the previous year, primarily due to the recovery of global demand for consumer electronics products. In 2010, export sales of semiconductor memory chips constituted approximately 10.9% of the Republic’s total exports. In 2011, electronics production amounted to W409,699 billion, an increase of 2.4% from the previous year, and exports amounted to US$156.6 billion, an increase of 1.8% from the previous year, primarily due to continued increase in global demand for mobile phones and tablet computers. In 2011, export sales of semiconductor memory chips constituted approximately 9.0% of the Republic’s total exports. In 2012, electronics production amounted to

166

W415,984 billion, an increase of 1.5% from the previous year, primarily due to increased domestic demand for mobile phones and non-memory semiconductors, and exports amounted to US$155.2 billion, a decrease of 0.9% from the previous year, primarily due to adverse economic conditions in European countries. In 2012, export sales of semiconductor memory chips constituted approximately 9.2% of the Republic’s total exports. Based on preliminary data, in 2013, electronics production amounted to W442,396 billion, an increase of 6.3% from the previous year, and exports amounted to US$169.4 billion, an increase of 9.1% from the previous year, primarily due to increases in demand for mobile phones in emerging markets and global demand for non-memory semiconductors. In 2013, export sales of semiconductor memory chips constituted approximately 10.2% of the Republic’s total exports.

Iron and Steel. In 2009, crude steel production totaled 48.6 million tons, a decrease of 8.9% from 2008, and domestic sales volume and export sales volume decreased by 21.4% and 1.2%, respectively, primarily due to adverse global economic conditions. In 2010, crude steel production totaled 58.9 million tons, an increase of 20.2% from 2009, and domestic sales volume and export sales volume increased by 21.6% and 21.1%, respectively, primarily due to the recovery of global demand for crude steel products. In 2011, crude steel production totaled 68.5 million tons, an increase of 16.3% from 2010, and domestic sales volume and export sales volume increased by 5.8% and 16.9%, respectively, primarily due to continued increase in global demand for crude steel products. In 2012, crude steel production totaled 69.1 million tons, an increase of 0.9% from 2011, and domestic sales volume decreased by 5.1% but export sales volume increased by 4.8%, primarily due to adverse conditions in the domestic shipbuilding and construction industries. Based on preliminary data, in 2013, crude steel production totaled 66.1 million tons, a decrease of 4.4% from 2012, and domestic sales volume and export sales volume decreased by 4.3% and 4.2%, respectively, primarily due to the appreciation of the Won against the US dollar and the Japanese Yen and excess supply from China.

Shipbuilding. In 2009, the Republic’s shipbuilding orders amounted to approximately 2 million compensated gross tons, a decrease of 85.7% compared to 2008 as a result of a decrease in ship orders due to adverse global economic conditions. In 2010, the Republic’s shipbuilding orders amounted to approximately 8 million compensated gross tons, an increase of 300.0% compared to 2009, primarily due to the recovery of global demand for bulk carriers and tank vessels. In 2011, the Republic’s shipbuilding orders amounted to approximately 12 million compensated gross tons, an increase of 50.0% compared to 2010, primarily due to increased demand for large container carriers, LNG carriers and floating production storage and offloading vessels. In 2012, the Republic’s shipbuilding orders amounted to approximately 7 million compensated gross tons, a decrease of 41.7% compared to 2011, primarily due to a downturn in the shipping and shipbuilding industry. Based on preliminary data, in 2013, the Republic’s shipbuilding orders amounted to approximately 17 million compensated gross tons, an increase of 142.8% compared to 2012, primarily due to increased demand for LNG carriers, bulk carriers and container carriers.

Agriculture, Forestry and Fisheries

The Government’s agricultural policy has traditionally focused on:

• grain production;

• development of irrigation systems;

• land consolidation and reclamation;

• seed improvement;

• mechanization measures to combat drought and flood damage; and

• increasing agricultural incomes.

Recently, however, the Government has increased emphasis on cultivating profitable crops and strengthening international competitiveness in anticipation of opening the domestic agricultural market.

167

In 2010, rice production decreased 12.2% from 2009 to 4.3 million tons. In 2011, rice production decreased 2.3% from 2010 to 4.2 million tons. In 2012, rice production decreased 4.7% from 2011 to 4.0 million tons. In 2013, rice production increased 5.0% from 2012 to 4.2 million tons. In 2014, rice production remained at 4.2 million tons. Due to limited crop yields resulting from geographical and physical constraints, the Republic depends on imports for certain basic foodstuffs.

The Government is seeking to develop the fishing industry by encouraging the building of large fishing vessels and modernizing fishing equipment, marketing techniques and distribution outlets.

In 2010, the agriculture, forestry and fisheries industry decreased by 4.4% compared to 2009, primarily due to decreases in production of rice, fruits and corns and fishing catch resulting from unusually unfavorable weather conditions, which more than offset an increase in the livestock industry. In 2011, the agriculture, forestry and fisheries industry decreased by 2.1% compared to 2010, primarily due to unfavorable weather conditions, including heavy rains, during the summer and a decrease in fishing catch. In 2012, the agriculture, forestry and fisheries industry decreased by 0.6% compared to 2011, primarily due to unfavorable weather conditions, including severe typhoons, which more than offset an increase in the livestock industry. In 2013, the agriculture, forestry and fisheries industry increased by 3.1% compared to 2012, primarily due to an increase in the cultivation and livestock industry. Based on preliminary data, in 2014, the agriculture, forestry and fisheries industry increased by 2.6% compared to 2013.

Construction

In 2010, the construction industry decreased by 2.7% compared to 2009, primarily due to a decrease in residential construction which more than offset an increase in commercial construction. In 2011, the construction industry decreased by 4.3% compared to 2010, primarily due to a decrease in the construction of residential and commercial buildings. In 2012, the construction industry decreased by 1.6% compared to 2011, primarily due to a decrease in the construction of residential buildings and port facilities. In 2013, the construction industry increased by 3.0% compared to 2012, primarily due to an increase in the construction of residential and commercial buildings. Based on preliminary data, in 2014, the construction industry increased by 0.6% compared to 2013. The construction industry has experienced a significant downturn since the second half of 2009, due to excessive investment in recent years in residential property development projects, stagnation of real property prices and reduced demand for residential property, especially in areas outside of Seoul, as a result of deteriorating conditions in the Korean economy in the second half of 2009 and into 2010. The Government has taken measures to support the Korean construction industry, including a W5 trillion program to buy unsold housing units and land from construction companies, the exemption of acquisition tax for first-time homebuyers, the reduction of acquisition tax for homebuyers and the reduction of transfer income tax for multiple home owners. However, the effect of these measures is uncertain and the construction industry may continue to experience adverse conditions.

Electricity and Gas

The following table sets out the Republic’s dependence on imports for energy consumption:

Dependence on Imports for Energy Consumption

	Total Energy Consumption		Imports		Imports Dependence Ratio
	(millions of tons of oil equivalents, except ratios)
2010		263.8		254.6		96.5
2011		276.6		266.8		96.5
2012		278.7		267.6		96.0
2013		280.3		268.1		95.7
2014		281.9		269.5		95.6

Source: Korea Energy Economics Institute; Korea National Statistical Office.

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Korea has almost no domestic oil or gas production and depends on imported oil and gas to meet its energy requirements. Accordingly, the international prices of oil and gas significantly affect the Korean economy. Any significant long-term increase in the prices of oil and gas will increase inflationary pressures in Korea and adversely affect the Republic’s balance of trade.

To reduce its dependence on oil and gas imports, the Government has encouraged energy conservation and energy source diversification emphasizing nuclear energy. The following table sets out the principal primary sources of energy consumed in the Republic, expressed in oil equivalents and as a percentage of total energy consumption.

Consumption of Energy by Source

	Coal				Petroleum				Nuclear				Others(1)				Total
	Quantity		%		Quantity		%		Quantity		%		Quantity		%		Quantity		%
	(millions of tons of oil equivalents, except percentages)
2010		77.1		29.2		104.3		39.5		31.9		12.1		50.5		19.1		263.8		100.0
2011		83.5		30.2		105.1		38.0		33.2		12.0		54.8		19.8		276.6		100.0
2012		81.1		29.1		106.2		38.1		31.8		11.4		59.6		21.4		278.7		100.0
2013		81.9		29.2		105.8		37.7		29.3		10.5		63.3		22.6		280.3		100.0
2014		84.8		30.1		105.0		37.2		33.0		11.7		59.1		21.0		281.9		100.0

(1) Includes natural gas, hydroelectric power and renewable energy.

Source: Korea Energy Economics Institute; The Bank of Korea.

The Republic’s first nuclear power plant went into full operation in 1978 with a rated generating capacity of 587 megawatts. As of December 31, 2013, the Republic has 23 nuclear plants with a total estimated nuclear power generating capacity of 20,716 megawatts and five nuclear plants under construction. In January 2014, the Ministry of Trade, Industry and Energy revised the target proportion of nuclear supply in the Korea’s energy supply mix from 41% by 2030 to 29% by 2035 while also approving the construction of two additional plants in line with previously announced plans to build 10 new nuclear plants by 2030 to replace aging nuclear power plants. The Government plans to expand infrastructure to supply natural gas to households, pursue a long-term strategy of overseas energy development projects to ensure supply stability, increase clean and renewable energy and provide support for research and development pertaining to green technologies.

Services Sector

In 2009, the service industry increased by 1.2% compared to 2008 as the financial intermediation sector increased by 4.4% which more than offset a 5.8% decrease in the transportation and storage sector and a 0.2% decrease in the real estate and renting sector, each compared with 2008. In 2010, the service industry increased by 4.4% compared to 2009 as the transportation and storage sector increased by 9.6%, the financial intermediation sector increased by 2.5% and the real estate and renting sector increased by 0.3%, each compared with 2009. In 2011, the service industry increased by 3.0% compared to 2010 as the transportation and storage sector increased by 3.8%, the financial intermediation sector increased by 1.6% and the real estate and renting sector increased by 2.2%, each compared with 2010. In 2012, the service industry increased by 2.7% compared to 2011 as the transportation and storage sector increased by 1.3%, the financial intermediation sector increased by 3.6% and the real estate and renting sector increased by 0.1%, each compared with 2011. Based on preliminary data, in 2013, the service industry increased by 2.8% compared to 2012 as the transportation and storage sector increased by 1.2%, the financial intermediation sector increased by 3.6% and the real estate and renting sector increased by 0.8%, each compared with 2012.

169

Prices, Wages and Employment

The following table shows selected price and wage indices and unemployment rates:

	Producer Price Index(1)		Increase (Decrease) Over Previous Year			Consumer Price Index(1)		Increase (Decrease) Over Previous Year		Wage Index(1)(2)			Increase (Decrease) Over Previous Year			Unemployment Rate(1)(3)
	(2010=100)		(%)			(2010=100)		(%)		(2010=100)			(%)			(%)
2010		100.0		3.8			100.0		3.0		100.0			(2.3	)		3.7
2011		106.7		6.7			104.0		4.0		100.3			0.3			3.4
2012		107.5		0.7			106.3		2.2		107.1			6.8			3.2
2013		105.7		(1.6	)		107.7		1.3		112.7			5.2			3.1
2014		105.2		(0.5	)		109.0		1.3		N/A	(4)		N/A	(4)		3.5

(1) Average for year.

(2) Nominal wage index of average earnings in manufacturing industry.

(3) Expressed as a percentage of the economically active population.

(4) Not available.

Source: The Bank of Korea; Korea National Statistical Office.

In 2010, the inflation rate increased to 3.0% from 2.8% in 2009, primarily due to increased oil prices and agricultural goods prices caused by abnormal weather in the second half of 2010. In 2011, the inflation rate increased to 4.0%, primarily due to increased oil prices in the first quarter as well as decreased supply in agricultural goods caused by unusually low temperatures in the spring and heavy rainfall in the summer. In 2012, the inflation rate decreased to 2.2%, primarily due to weakened aggregate demand and the implementation of new policies, including free school lunches. In 2013, the inflation rate decreased to 1.3%, primarily due to increased supply of agricultural goods. In 2014, the inflation rate remained at 1.3%, primarily due to increases in the prices of electricity, gas, water supply, food products and education, which were offset by lower oil prices.

In 2010, the unemployment rate increased to 3.7% from 3.6% in 2009, primarily due to a steeper increase in the economically active population than the increase in the number of employed workers. In 2011, the unemployment rate decreased to 3.4%, primarily due to an increase in the number of workers employed in the service industry (including healthcare, social welfare and education). In 2012, the unemployment rate decreased to 3.2%, primarily due to the continued increase in the number of workers employed in the service industry. In 2013, the unemployment rate decreased to 3.1%, primarily due to the continued increase in the number of workers employed in the service industry. In 2014, the unemployment rate increased to 3.5%, primarily due to the sluggishness of the domestic economy.

From 1992 to 2009, the economically active population of the Republic increased by approximately 24.8% to 24.3 million, while the number of employees increased by approximately 23.7% to 23.5 million. The economically active population over 15 years old as a percentage of the total over-15 population has remained between 60% and 63% over the past decade. Literacy among workers under 50 is almost universal. As of December 31, 2014, the economically active population of the Republic was 26.5 million and the number of employees was 25.6 million.

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The following table shows selected employment information by industry and by gender:

	2010		2011		2012		2013		2014
	(all figures in percentages, except as indicated)
Labor force (in thousands of persons)		23,829		24,244		24,681		25,066		25,599
Employment by Industry:
Agriculture, Forestry and Fishing		6.6		6.4		6.2		6.1		5.7
Mining and Manufacturing		17.0		16.9		16.7		16.8		17.0
S.O.C & Services		76.5		76.7		77.1		77.2		77.4
Electricity, Transport, Communication and Finance		11.9		12.2		12.1		12.2		11.9
Business, Private & Public Service and Other Services		34.2		34.6		35.1		35.5		35.5
Construction		7.4		7.2		7.2		7.0		7.0
Wholesale & Retail Trade, Hotels and Restaurants		23.0		22.7		22.7		22.5		23.0
Total Employed		100.0		100.0		100.0		100.0		100.0
Employment by Gender:
Male		58.4		58.4		58.3		58.1		58.0
Female		41.6		41.6		41.7		41.9		42.0
Total Employed		100.0		100.0		100.0		100.0		100.0

Source: The Bank of Korea

As of July 1, 2004, the Republic adopted a five-day workweek for large corporations with over 1,000 employees, publicly-owned (state-run) companies, banks and insurance companies, reducing working hours from 44 to 40 hours a week. The adoption of the five-day workweek has been extended to companies with over 300 employees and to government employees as of July 1, 2005 and to companies with over 100 employees as of July 1, 2006. Companies with more than 50 employees adopted the five-day workweek as of July 1, 2007 and those with over 20 adopted the five-day workweek as of July 1, 2008. Companies with less than 20 employees also adopted the five-day workweek on July 1, 2011.

Approximately 10.3% of the Republic’s workers were unionized as of December 31, 2012. Labor unrest in connection with demands by unionized workers for better wages and working conditions and greater job security occur from time to time in the Republic. Some of the significant incidents in recent years include the following:

• In December 2010, unionized workers at Hanjin Heavy Industries went on strike when the company laid-off workers. While the company reached an agreement with the majority of workers in June 2011, one worker continued her protest by occupying a shipyard crane until November 2011.

• In July 2011, unionized employees at Standard Chartered Korea (formerly, SC First Bank) engaged in a two-month strike, the longest in the Republic’s banking sector, demanding that the bank scrap performance-related pay reforms.

• In June 2012, unionized taxi drivers went on their first nationwide strike demanding fare increases and protesting against increased fuel costs.

• In August 2012, unionized workers of Hyundai Motor Company went on a series of partial strikes demanding a higher bonus increase and the end of overnight shifts.

• In August 2013, unionized workers at Hyundai Motor Company and Kia Motors Corporation went on partial strikes demanding higher wages.

• In December 2013, unionized workers at the state owned Korea Railroad Corporation (“Korail”) went on strike against Korail’s plan to establish a separate company to operate a new bullet train line fearing that such plan would eventually lead to privatization of Korail and layoffs of existing workers.

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• In November 2014, unionized workers at Hyundai Heavy Industries went on a series of partial strikes demanding higher wages.

Actions such as these by labor unions may hinder implementation of the labor reform measures and disrupt the Government’s plans to create a more flexible labor market. Although much effort is being expended to resolve labor disputes in a peaceful manner, there can be no assurance that further labor unrest will not occur in the future. Continued labor unrest in key industries of the Republic may have an adverse effect on the economy.

In 1997, the Korean Confederation of Trade Unions organized a political alliance, which led to the formation of the Democratic Labor Party in January 2000. The Democratic Labor Party merged with The New People’s Participation Party and changed its name to The Unified Progressive Party (“UPP”) in December 2011. In October 2012, the UPP split and seven UPP members of the National Assembly and their supporters formed a new party, the Progressive Justice Party, which changed its name to the Justice Party in July 2013. After certain of its members were convicted of trying to instigate an armed rebellion and supporting North Korea, the Constitutional Court ordered the dissolution of the UPP and the removal of the party’s five lawmakers for violating the Republic’s Constitution.

The Financial System

Structure of the Financial Sector

The Republic’s financial sector includes the following categories of financial institutions:

• The Bank of Korea;

• banking institutions;

• non-bank financial institutions; and

• other financial entities, including:

• financial investment companies;

• credit guarantee institutions;

• venture capital companies; and

• miscellaneous others.

To increase transparency in financial transactions and enhance the integrity and efficiency of the financial markets, Korean law requires that financial institutions confirm that their clients use their real names when transacting business. To ease the liquidity crisis, the Government altered the real-name financial transactions system during 1998, to allow the sale or deposit of foreign currencies through domestic financial institutions and the purchase of certain bonds, including Government bonds, without identification. The Government also strengthened confidentiality protection for private financial transactions.

In July 2007, the Korean National Assembly passed the Financial Investment Services and Capital Markets Act or FSCMA, under which various industry-based capital markets regulatory systems currently were consolidated into a single regulatory system. The FSCMA, which became effective in February 2009, expands the scope of permitted investment-related financial products and activities through expansive definitions of financial instruments and function-based regulations that allow financial investment companies to offer a wider range of financial services, as well as strengthening investor protection and disclosure requirements. The Enforcement Decree of the FSCMA classifies the financial investment companies into a total of 78 categories depending on the types of (i) financial investment services, (ii) financial investment products, and (iii) investors.

Prior to the effective date of the Financial Investment Services and Capital Markets Act, separate laws regulated various types of financial institutions depending on the type of the financial institution (for example, securities companies, futures companies, trust business companies and asset management companies) and subjected financial institutions to different licensing and ongoing regulatory requirements (for example, under the

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Securities and Exchange Act, the Futures Business Act and the Indirect Investment Asset Management Business Act). By applying one uniform set of rules to financial businesses having the same economic function, the Financial Investment Services and Capital Markets Act attempts to improve and address issues caused by the previous regulatory system under which the same economic function relating to capital markets-related business were governed by multiple regulations. To this end, the Financial Investment Services and Capital Markets Act categorizes capital markets-related businesses into six different functions, as follows:

• investment dealing (trading and underwriting of financial investment products);

• investment brokerage (brokerage of financial investment products);

• collective investment (establishment of collective investment schemes and the management thereof);

• investment advice;

• discretionary investment management; and

• trusts (together with the five businesses set forth above, “Financial Investment Businesses”).

Accordingly, all financial businesses relating to financial investment products are reclassified as one or more of the Financial Investment Businesses described above, and financial institutions are subject to the regulations applicable to their relevant Financial Investment Businesses, irrespective of what type of financial institution it is. For example, under the Financial Investment Services and Capital Markets Act, derivative businesses conducted by securities companies and future companies will be subject to the same regulations under the Financial Investment Services and Capital Markets Act, at least in principle.

The banking business and the insurance business are not subject to the Financial Investment Services and Capital Markets Act and will continue to be regulated under separate laws; provided, however, that they are subject to the Financial Investment Services and Capital Markets Act if their activities involve any Financial Investment Businesses requiring a license based on the Financial Investment Services and Capital Markets Act.

Banking Industry

The banking industry comprises commercial banks and specialized banks. Commercial banks serve the general public and corporate sectors. They include nationwide banks, regional banks and branches of foreign banks. Regional banks provide services similar to nationwide banks, but operate in a geographically restricted region. Branches of foreign banks have operated in the Republic since 1967 but provide a relatively small proportion of the country’s banking services. As of December 31, 2013, commercial banks consisted of seven nationwide banks, all of which have branch networks throughout the Republic, six regional banks and 55 branches of 39 foreign banks operating in the country. Nationwide and regional banks had, in the aggregate, 5,616 domestic branches and offices, 49 overseas branches, 21 overseas representative offices and 31 overseas subsidiaries as of December 31, 2013.

Specialized banks meet the needs of specific sectors of the economy in accordance with Government policy; they are organized under, or chartered by, special laws. Specialized banks include:

• The Korea Development Bank;

• The Export-Import Bank of Korea;

• The Industrial Bank of Korea;

• National Federation of Fisheries Cooperatives; and

• NH Bank (which was established by a spin-off of the credit and banking unit from the National Agricultural Cooperative Federation in March 2012).

The economic difficulties in 1997 and 1998 caused an increase in Korean banks’ non-performing assets and a decline in capital adequacy ratios of Korean banks. From 1998 through 2002, the Financial Services

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Commission amended banking regulations several times to adopt more stringent criteria for non-performing assets that more closely followed international standards. Non-performing assets are assets classified as doubtful or estimated loss under Korean banking regulations.

The following table sets out the total loans (including loans in Won and loans in foreign currencies) and non-performing assets of Korean banks.

	Total Loans		Non-Performing Assets		Percentage of Total
	(trillions of won)				(percentage)
December 31, 2010		1,308.9		24.8		1.9
December 31, 2011		1,387.6		18.8		1.4
December 31, 2012		1,390.9		18.5		1.3
December 31, 2013		1,441.6		25.8		1.8
December 31, 2014		1,558.0		23.8		1.5

Source: Financial Supervisory Service.

As of December 31, 2013, loans denominated in Won held by these banks increased by 5.1% to W1,162.8 trillion from W1,106.4 trillion as of December 31, 2012, primarily due to (i) an increase in loans to small and medium-enterprises by 6.0% to W489.0 trillion as of December 31, 2013 from W461.3 trillion as of December 31, 2012 and (ii) an increase in household loans by 3.1% to W479.0 trillion as of December 31, 2013 from W464.5 trillion as of December 31, 2012. Based on preliminary data, as of December 31, 2014, loans denominated in Won held by these banks increased by 8.0% to W1,255.8 trillion from W1,162.8 trillion as of December 31, 2013, primarily due to (i) an increase in household loans by 8.2% to W518.2 trillion as of December 31, 2014 from W479.0 trillion as of December 31, 2013, (ii) an increase in loans to small and medium-enterprises by 6.8% to W522.4 trillion as of December 31, 2014 from W489.0 trillion as of December 31, 2013 and (iii) an increase in loans to large corporations by 10.5% to W183.5 trillion as of December 31, 2014 from W166.1 trillion as of December 31, 2013.

In 2010, these banks posted an aggregate net profit of W9.3 trillion, compared to an aggregate net profit of W6.9 trillion in 2009, primarily due to increased net interest income. In 2011, these banks posted an aggregate net profit of W11.8 trillion, compared to an aggregate net profit of W9.3 trillion in 2010, primarily due to decreased non-performing loans. In 2012, these banks posted an aggregate net profit of W8.7 trillion, compared to an aggregate net profit of W11.8 trillion in 2011, primarily due to a decrease in gain on sale of equity securities and an increase in impairment loss on available-for-sale securities. In 2013, these banks posted an aggregate net profit of W3.9 trillion, compared to an aggregate net profit of W8.7 trillion in 2012, primarily due to decreased net interest income and increased loan loss provisions. Based on preliminary data, in 2014, these banks posted an aggregate net profit of W6.2 trillion, compared to an aggregate net profit of W3.9 trillion in 2013, primarily due to decreased loan loss provisions.

Non-Bank Financial Institutions

Non-bank financial institutions include:

• savings institutions, including trust accounts of banks, mutual savings banks, credit unions, mutual credit facilities, community credit cooperatives and postal savings;

• life insurance institutions; and

• credit card companies.

The country had 89 mutual savings banks as of December 31, 2013, with assets totaling W39.0 trillion.

As of December 31, 2013, 14 domestic life insurance institutions, two joint venture life insurance institutions and nine wholly-owned subsidiaries of foreign life insurance companies, with assets totaling approximately W597.3 trillion as of December 31, 2013, were operating in the Republic.

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As of December 31, 2013, eight credit card companies operated in the country with loans totaling approximately W86.5 trillion.

Money Markets

In the Republic, the money markets consist of the call market and markets for a wide range of other short- term financial instruments, including treasury bills, monetary stabilization bonds, negotiable certificates of deposits, repurchase agreements and commercial paper.

Securities Markets

On January 27, 2005, the Korea Exchange was established pursuant to the now repealed Korea Securities and Futures Exchange Act by consolidating the Korea Stock Exchange, the Korea Futures Exchange, the KOSDAQ Stock Market, Inc., or the KOSDAQ, and the KOSDAQ Committee of the Korea Securities Dealers Association, which had formerly managed the KOSDAQ. There are three different markets operated by the Korea Exchange: the KRX KOSPI Market, the KRX KOSDAQ Market, and the KRX Derivatives Market. The Korea Exchange has two trading floors located in Seoul, one for the KRX KOSPI Market and one for the KRX KOSDAQ Market, and one trading floor in Busan for the KRX Derivatives Market. The Korea Exchange is a joint stock company with limited liability, the shares of which are held by (i) financial investment companies that were formerly members of the Korea Futures Exchange or the Korea Stock Exchange and (ii) the stockholders of the KOSDAQ. Currently, the Korea Exchange is the only stock exchange in Korea and is operated by membership, having as its members Korean financial investment companies and some Korean branches of foreign financial investment companies.

The Korea Exchange publishes the Korea Composite Stock Price Index every ten seconds, which is an index of all equity securities listed on the Korea Exchange. The Korea Composite Stock Price Index is computed using the aggregate value method, whereby the market capitalizations of all listed companies are aggregated, subject to certain adjustments, and this aggregate is expressed as a percentage of the aggregate market capitalization of all listed companies as of the base date, January 4, 1980.

The following table shows the value of the Korea Composite Stock Price Index as of the dates indicated:

December 31, 2009	1,682.8
January 29, 2010	1,602.4
February 26, 2010	1,594.6
March 31, 2010	1,692.9
April 30, 2010	1,741.6
May 31, 2010	1,641.3
June 30, 2010	1,698.3
July 30, 2010	1,759.3
August 31, 2010	1,742.8
September 30, 2010	1,872.8
October 29, 2010	1,883.0
November 30, 2010	1,904.6
December 31, 2010	2,051.0
January 31, 2011	2,069.7
February 28, 2011	1,939.3
March 31, 2011	2,106.7
April 30, 2011	2,192.4
May 29, 2011	2,142.5
June 30, 2011	2,100.7
July 31, 2011	2,133.2

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August 31, 2011	1,880.1
September 30, 2011	1,769.7
October 31, 2011	1,909.0
November 30, 2011	1,847.5
December 31, 2011	1,825.7
January 31, 2012	1,955.8
February 29, 2012	2,030.3
March 31, 2012	2,014.0
April 30, 2012	1,982.0
May 31, 2012	1,843.5
June 29, 2012	1,854.0
July 31, 2012	1,882.0
August 31, 2012	1,905.1
September 28, 2012	1,996.2
October 31, 2012	1,912.1
November 30, 2012	1,932.9
December 31, 2012	1,997.1
January 31, 2013	1,961.9
February 28, 2013	2,026.5
March 29, 2013	2,004.9
April 30, 2013	1,964.0
May 30, 2013	2,001.1
June 28, 2013	1,863.3
July 31, 2013	1,914.0
August 30, 2013	1,926.4
September 30, 2013	1,997.0
October 31, 2013	2,030.1
November 29, 2013	2,044.9
December 31, 2013	2,011.3
January 29, 2014	1,941.2
February 28, 2014	1,980.0
March 31, 2014	1,985.6
April 30, 2014	1,961.8
May 30, 2014	1,995.0
June 30, 2014	2,002.2
July 31, 2014	2,076.1
August 29, 2014	2,068.5
September 30, 2014	2,020.1
October 31, 2014	1,964.4
November 28, 2014	1,980.8
December 30, 2014	1,915.6
January 30, 2015	1,949.3
February 27, 2015	1,985.8
March 31, 2015	2,041.0

On December 27, 1997, the last day of trading in 1997, the index stood at 376.3, a sharp decline from 647.1 on September 30, 1997. The fall resulted from growing concerns about the Republic’s weakening financial and corporate sectors, the Republic’s falling foreign currency reserves, the sharp depreciation of the Won against the U.S. Dollar and other external factors, such as a sharp decline in stock prices in Hong Kong on October 24, 1997 and financial turmoil in Southeast Asian countries. The Korea Composite Stock Price Index recovered to reach 2,064.9 in late 2007 but since then the index declined. As liquidity and credit concerns and volatility in the global financial markets increased significantly since September 2008, there was a significant overall decline in

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the stock prices of Korean companies during the fourth quarter of 2008 and first half of 2009 and continuing volatility since then. The index was 2,142.6 on April 29, 2015.

Supervision System

The Office of Bank Supervision, the Securities Supervisory Board, the Insurance Supervisory Board and all other financial sector regulatory bodies merged in January 1999 to form the Financial Services Commission. The Financial Services Commission acts as the executive body over the Financial Supervisory Service. The Financial Services Commission reports to, but operates independently of, the Prime Minister’s office.

The Ministry of Strategy and Finance focuses on financial policy and foreign currency regulations. The Bank of Korea manages monetary policy focusing on price stabilization.

Deposit Insurance System

The Republic’s deposit insurance system insures amounts on deposit with banks, non-bank financial institutions, securities companies and life insurance companies.

Since January 2001, deposits at any single financial institution are insured only up to W50 million per person regardless of the amount deposited.

The Government excluded certain deposits, such as repurchase agreements, from the insurance scheme, expanded the definition of unsound financial institutions to which the insurance scheme would apply and gradually increased the insurance premiums payable by insured financial institutions.

Monetary Policy

The Bank of Korea

The Bank of Korea was established in 1950 as Korea’s central bank and the country’s sole currency issuing bank. A seven-member Monetary Policy Committee, chaired by the Governor of The Bank of Korea, formulates and controls monetary and credit policies.

Inflation targeting is the basic system of operation for Korean monetary policy. The consumer price index is used as The Bank of Korea’s target indicator. To achieve its established inflation target, the Monetary Policy Committee of The Bank of Korea determines and announces the “Bank of Korea Base Rate,” the reference rate applied in transactions such as repurchase agreements between The Bank of Korea and its financial institution counterparts. The Bank of Korea uses open market operations as its primary instrument to keep the call rate in line with the Monetary Policy Committee’s target rate. In addition, The Bank of Korea is able to establish policies regarding its lending to banks in Korea and their reserve requirements.

Interest Rates

On July 12, 2007, The Bank of Korea raised the policy rate to 4.75% from 4.5%, and raised it further to 5.0% on August 9, 2007. The rationale for this change was the concern that the ample market liquidity might put upside pressure on inflation in the medium to long term as the economic upswing continued. On August 7, 2008, The Bank of Korea raised the policy rate to 5.25% from 5.0%, taking the view that inflation in consumer prices had picked up its pace, due to the direct and indirect effects of high oil prices, at a time when domestic economic activity had slackened. On October 9, 2008, The Bank of Korea cut its policy rate to 5.0% from 5.25%, and continued to lower it further to 4.25% on October 27, 2008, 4.0% on November 7, 2008, 3.0% on December 11, 2008, 2.5% on January 9, 2009 and 2.0% on February 12, 2009, in order to address financial market instability and to help combat the slowdown of the domestic economy. On July 9, 2010, The Bank of Korea raised the

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policy rate to 2.25% from 2.0%, which was further raised to 2.5% on November 16, 2010, in response to signs of inflationary pressures and the continued growth of domestic economy. On January 13, 2011, The Bank of Korea raised the policy rate to 2.75%, which was further increased to 3.0% on March 10, 2011 and to 3.25% on June 10, 2011, in response to inflationary pressures driven mainly by rises in the prices of petroleum products and farm products. The Bank of Korea lowered its policy rate to 3.0% from 3.25% on July 12, 2012, which was further lowered to 2.75% on October 11, 2012, to 2.5% on May 9, 2013, to 2.25% on August 14, 2014, 2.0% on October 15, 2014 and 1.75% on March 12, 2015, in order to address the sluggishness of the global and domestic economy.

With the deregulation of interest rates on banks’ demand deposits on February 2, 2004, The Bank of Korea completed the interest rate deregulation based upon the “Four-Stage Interest Rate Liberalization Plan” announced in 1991. The prohibition on the payment of interest on ordinary checking accounts was, however, maintained.

Money Supply

The following table shows the volume of the Republic’s money supply:

	December 31,
	2010			2011			2012			2013			2014
	(billions of Won)
Money Supply (M1)(1)		427,791.6			442,077.5			470,010.6			515,643.4			585,822.6
Quasi-money(2)		1,232,738.4			1,309,380.9			1,365,631.0			1,405,151.6			1,491,411.4
Money Supply (M2)(3)		1,660,530.0			1,751,458.4			1,835,641.6			1,920,795.0			2,077,234.0
Percentage Increase Over Previous Year		6.0	%		5.5	%		4.8	%		4.6	%		8.1	%

(1) Consists of currency in circulation and demand and instant access savings deposits at financial institutions.

(2) Includes time and installment savings deposits, marketable instruments, yield-based dividend instruments and financial debentures, excluding financial instruments with a maturity of more than two years.

(3) Money Supply (M2) is the sum of Money Supply (M1) and quasi-money.

Source: The Bank of Korea.

Exchange Controls

Authorized foreign exchange banks, as registered with the Ministry of Strategy and Finance, handle foreign exchange transactions. The ministry has designated other types of financial institutions to handle foreign exchange transactions on a limited basis.

Korean laws and regulations generally require a report to either the Ministry of Strategy and Finance, The Bank of Korea or authorized foreign exchange banks, as applicable, for issuances of international bonds and other instruments, overseas investments and certain other transactions involving foreign exchange payments.

In 1994 and 1995, the Government relaxed regulations of foreign exchange position ceilings and foreign exchange transaction documentation and created free Won accounts which may be opened by non-residents at Korean foreign exchange banks. The Won funds deposited into the free Won accounts may be converted into foreign currencies and remitted outside Korea without any governmental approval. In December 1996, after joining the OECD, the Republic freed the repatriation of investment funds, dividends and profits, as well as loan repayments and interest payments. The Government continues to reduce exchange controls in response to changes in the world economy, including the new trade regime under the WTO, anticipating that such foreign exchange reform will improve the Republic’s competitiveness and encourage strategic alliances between domestic and foreign entities.

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In September 1998, the National Assembly passed the Foreign Exchange Transactions Act, which became effective in April 1999 and has subsequently been amended numerous times. In principle, most currency and capital transactions, including, among others, the following transactions, have been liberalized:

• the investment in real property located overseas by Korean companies and financial institutions;

• the establishment of overseas branches and subsidiaries by Korean companies and financial institutions;

• the investment by non-residents in deposits and trust products having more than one year maturities; and

• the issuance of debentures by non-residents in the Korean market.

To minimize the adverse effects from further opening of the Korean capital markets, the Ministry of Strategy and Finance is authorized to introduce a variable deposit requirement system to restrict the influx of short-term speculative funds.

The Government has also embarked on a second set of liberalization initiatives starting in January 2001, under which ceilings on international payments for Korean residents have been eliminated, including overseas travel expenses, overseas inheritance remittances and emigration expenses. Overseas deposits, trusts, acquisitions of foreign securities and other foreign capital transactions made by residents and the making of deposits in Korean currency by non-residents have also been liberalized. In line with the foregoing liberalization, measures will also be adopted to curb illegal foreign exchange transactions and to stabilize the foreign exchange market.

Effective as of January 1, 2006, the Government liberalized the regulations governing “capital transactions.” The regulations provide that no regulatory approvals are required for any capital transactions. The capital transactions previously subject to approval requirements are now subject only to reporting requirements.

In January 2010, the Financial Supervisory Services released FX Derivative Transactions Risk Management Guideline to prevent over-hedging of foreign exchange risk by corporate investors. According to the guideline as amended in July 2010, if a corporate investor, other than a financial institution or a public enterprise, wishes to enter into a foreign exchange forward, option or swap agreement with a bank, the bank is required to verify whether the corporate investor’s assets, liabilities or contracts face foreign exchange risks that could be mitigated by a foreign exchange forward, option or swap agreement. In addition, the bank is required to ensure that the corporate investor’s risk hedge ratio, which is the ratio of the aggregate notional amount to the aggregate amount of risk, does not exceed 100%.

Foreign Exchange

The following table shows the exchange rate between the Won and the U.S. Dollar (in Won per U.S. Dollar) as announced by the Seoul Money Brokerage Services, Ltd. as of the dates indicated:

	Won/U.S. Dollar Exchange Rate
December 31, 2009		1,167.6
January 29, 2010		1,156.5
February 26, 2010		1,158.4
March 31, 2010		1,130.8
April 30, 2010		1,115.5
May 31, 2010		1,200.2
June 30, 2010		1,210.3
July 30, 2010		1,187.2
August 31, 2010		1,189.1
September 30, 2010		1,142.0
October 29, 2010		1,126.6
November 30, 2010		1,157.3

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	Won/U.S. Dollar Exchange Rate
December 31, 2010		1,138.9
January 31, 2011		1,114.3
February 28, 2011		1,127.9
March 31, 2011		1,107.2
April 30, 2011		1,072.3
May 31, 2011		1,080.6
June 30, 2011		1,078.1
July 30, 2011		1,052.6
August 31, 2011		1,071.7
September 30, 2011		1,179.5
October 31, 2011		1,104.9
November 30, 2011		1,150.3
December 31, 2011		1,153.3
January 31, 2012		1,125.0
February 29, 2012		1,126.5
March 31, 2012		1,137.8
April 30, 2012		1,134.2
May 31, 2012		1,177.8
June 29, 2012		1,153.8
July 31, 2012		1,136.2
August 31, 2012		1,134.6
September 28, 2012		1,118.6
October 31, 2012		1,094.1
November 30, 2012		1,084.7
December 31, 2012		1,071.1
January 31, 2013		1,082.7
February 28, 2013		1,085.4
March 29, 2013		1,112.1
April 30, 2013		1,108.1
May 30, 2013		1,128.3
June 28, 2013		1,149.7
July 31, 2013		1,113.6
August 31, 2013		1,110.9
September 30, 2013		1,075.6
October 31, 2013		1,061.4
November 29, 2013		1,062.1
December 31, 2013		1,055.3
January 29, 2014		1,079.2
February 28, 2014		1,067.7
March 31, 2014		1,068.8
April 30, 2014		1,031.7
May 30, 2014		1,021.6
June 30, 2014		1,014.4
July 31, 2014		1,024.3
August 29, 2014		1,013.6
September 30, 2014		1,059.6
October 31, 2014		1,054.0
November 28, 2014		1,101.1

180

	Won/U.S. Dollar Exchange Rate
December 31, 2014		1,099.2
January 30, 2015		1,090.8
February 27, 2015		1,099.2
March 31, 2015		1,105.0

Prior to November 1997, the Government had permitted exchange rates to float within a daily range of 2.25%. In response to the substantial downward pressures on the Won caused by the Republic’s economic difficulties in late 1997, in November 1997, the Government expanded the range of permitted daily exchange rate fluctuations to 10%. The Government eliminated the daily exchange rate band in December 1997, and the Won now floats according to market forces. The value of the Won relative to the U.S. dollar depreciated from W888.1 to US$1.00 on June 30, 1997 to W1,964.8 to US$1.00 on December 24, 1997. Due to improved economic conditions and increases in trade surplus, the Won has generally appreciated against the U.S. dollar, although the trend reversed in March 2008. During the period from January 2, 2008 through April 16, 2009, the value of the Won relative to the U.S. dollar declined by approximately 29.9%, due primarily to adverse economic conditions resulting from liquidity and credit concerns and volatility in the global credit and financial markets and repatriations by foreign investors of their investments in the Korean stock market. The market average exchange rate was W1,070.9 to US$1.00 on April 29, 2015.

Balance of Payments and Foreign Trade

Balance of Payments

Balance of payments figures measure the relative flow of goods, services and capital into and out of the country as represented in the current balance and the capital balance. The current balance tracks a country’s trade in goods and services and transfer payments and measures whether a country is living within its income from trading and investments. The capital balance covers all transactions involving the transfer of capital into and out of the country, including loans and investments. The overall balance represents the sum of the current and capital balances. An overall balance surplus indicates a net inflow of foreign currencies, thereby increasing demand for and strengthening the local currency. An overall balance deficit indicates a net outflow of foreign currencies, thereby decreasing demand for and weakening the local currency. The financial account mirrors the overall balance. If the overall balance is positive, the surplus, which represents the nation’s savings, finances the overall deficit of the country’s trading partners. Accordingly, the financial account will indicate cash outflows equal to the overall surplus. If, however, the overall balance is negative, the nation has an international deficit which must be financed. Accordingly, the financial account will indicate cash inflows equal to the overall deficit.

The following table sets out certain information with respect to the Republic’s balance of payments:

Balance of Payments(1)

Classification	2010			2011			2012			2013			2014(4)
	(millions of dollars)
Current Account		28,850.4			18,655.8			50,835.0			81,148.2			89,220.1
Goods		47,915.4			29,089.9			49,406.0			82,781.0			92,687.6
Exports(2)		463,769.6			587,099.7			603,509.2			618,156.9			621,298.9
Imports(2)		415,854.2			558,009.8			554,103.2			535,375.9			528,611.3
Services		(14,238.4	)		(12,279.1	)		(5,213.6	)		(6,499.2	)		(8,163.4	)
Income		489.9			6,560.6			12,116.7			9,055.7			10,197.7
Current Transfers		(5,316.5	)		(4,715.6	)		(5,474.1	)		(4,189.3	)		(5,501.8	)
Capital and Financial Account		(23,253.2	)		(24,427.8	)		(51,624.1	)		(80,131.6	)		(90,392.3	)
Capital Account		(63.2	)		(112.0	)		(41.7	)		(27.0	)		(9.0	)
Financial Account(3)		(23,190.0	)		(24,315.8	)		(51,582.4	)		(80,104.6	)		(90,383.3	)
Net Errors and Omissions		(5,597.2	)		5,772.0			789.1			(1,016.6	)		1,172.2

181

(1) Figures are prepared based on the sixth edition of Balance of Payment Manual, or BPM6, published by International Monetary Fund in December 2010 and implemented by the Government in December 2013.

(2) These entries are derived from trade statistics and are valued on a free on board basis, meaning that the insurance and freight costs are not included.

(3) Includes borrowings from the IMF, syndicated bank loans and short-term borrowings.

(4) Preliminary.

Source: The Bank of Korea.

The Republic recorded a current account surplus of approximately US$81.1 billion in 2013. The current account surplus in 2013 increased from the current account surplus of US$50.8 billion in 2012, primarily due to an increase in surplus from the goods account.

Based on preliminary data, the Republic recorded a current account surplus of approximately US$89.4 billion in 2014. The current account surplus in 2014 increased from the current account surplus of US$81.1 billion in 2013, primarily due to an increase in surplus from the goods account.

Foreign Direct Investment

Since 1960, the Government has adopted a broad range of related laws, administrative rules and regulations, providing a framework for the conduct and regulation of foreign investment activities. In September 1998, the Government promulgated the Foreign Investment Promotion Act, or the FIPA, which replaced previous foreign direct investment related laws, rules and regulations, to promote inbound foreign investments by providing incentives to, and facilitating investment activities in the Republic by, foreign nationals. The FIPA prescribes, among others, procedural requirements for inbound foreign investments, incentives for foreign investments such as tax reductions, and requirements relating to designation and development of foreign investment target regions. The Government believes that providing a stable and receptive environment for foreign direct investment will accelerate the inflow of foreign capital, technology and management techniques.

The following table sets forth information regarding annual foreign direct investment in the Republic for the periods indicated.

Foreign Direct Investment

	2010		2011		2012		2013		2014
	(billions of dollars)
Contracted and Reported Investment
Greenfield Investment(1)		11.1		11.7		12.5		9.6		11.0
Merger & Acquisition		2.0		2.0		3.8		5.0		8.0
Total		13.1		13.7		16.3		14.5		19.0
Actual Investment		5.4		6.6		10.7		9.8		11.8

(1) Includes building new factories and operational facilities.

Source: Ministry of Trade, Industry and Energy

In 2014, the contracted and reported amount of foreign direct investment in the Republic increased to US$19.0 billion from US$14.5 billion in 2013, primarily due to an increase in foreign investment in the manufacturing sector to US$7.6 billion in 2014 from US$4.6 billion in 2013.

182

The following table sets forth information regarding the source of foreign direct investment by region and country for the periods indicated:

Foreign Direct Investment by Region and Country

	2010		2011		2012		2013		2014
	(billions of dollars)
North America
U.S.A		2.0		2.4		3.7		3.5		3.6
Others		0.7		1.3		0.7		1.1		1.4
		2.7		3.7		4.4		4.6		5.0
Asia
Japan		2.1		2.3		4.5		2.7		2.5
Hong Kong		0.1		0.6		1.7		1.0		1.1
Singapore		0.8		0.6		1.4		0.4		1.7
China		0.4		0.7		0.7		0.5		1.2
Others		3.5		0.2		0.5		0.4		0.3
		6.9		4.4		8.8		5.0		6.8
European Union
England		0.6		0.9		0.4		0.1		0.4
Netherlands		1.2		1.0		0.6		0.6		2.4
Germany		0.3		1.5		0.4		0.4		0.2
France		0.2		0.2		0.2		0.5		0.2
Luxembourg		0.1		0.1		0.2		0.7		1.9
Others		0.9		1.7		1.2		2.6		1.6
		3.3		5.4		3.0		4.9		6.7
Others regions and countries		0.2		0.2		0.1		0.0		0.5
Total		13.1		13.7		16.3		14.5		19.0

Source: Ministry of Trade, Industry and Energy

Trade Balance

Trade balance figures measure the difference between a country’s exports and imports. If exports exceed imports the country has a trade balance surplus while if imports exceed exports the country has a deficit. A deficit, indicating that a country’s receipts from abroad fall short of its payments to foreigners, must be financed, rendering the country a debtor nation. A surplus, indicating that a country’s receipts exceed its payments to foreigners, allows the country to finance its trading partners’ net deficit to the extent of the surplus, rendering the country a creditor nation.

The following table summarizes the Republic’s trade balance for the periods indicated:

Trade Balance

	Exports(1)		As % of GDP(2)			Imports(3)		As % of GDP(2)			Balance of Trade		Exports as % of Imports
	(billions of dollars, except percentages)
2010		466.4		42.6	%		425.2		38.9	%		41.2		109.6
2011		555.2		46.9	%		524.4		44.3	%		30.8		105.8
2012		547.9		46.0	%		519.6		43.6	%		28.3		105.4
2013		559.6		44.4	%		515.6		40.9	%		44.0		108.5
2014(4)		572.7		44.1	%		525.5		40.5	%		47.2		109.0

183

(1) These entries are derived from customs clearance statistics on a C.I.F. basis, meaning that the price of goods include insurance and freight cost.

(2) At chained 2010 year prices.

(3) These entries are derived from customs clearance statistics on a C.I.F. basis, meaning that the price of goods include insurance and freight cost.

(4) Preliminary.

Source: The Bank of Korea; Korea Customs Service.

The Republic, due to its lack of natural resources, relies on extensive trading activity for growth. The country meets virtually all domestic requirements for petroleum, wood and rubber with imports, as well as much of its coal and iron needs. Exports consistently represent a high percentage of GDP and, accordingly, the international economic environment is of crucial importance to the Republic’s economy.

The following tables give information regarding the Republic’s exports and imports by major commodity groups:

Exports by Major Commodity Groups (C.I.F.)(1)

	2010		As %  of 2010 Total		2011		As %  of 2011 Total		2012		As %  of 2012 Total		2013		As %  of 2013 Total		2014(2)		As %  of 2014 Total(2)
	(billions of dollars, except percentages)
Foods & Consumer Goods		5.3		1.2		6.5		1.2		6.8		1.2		6.7		1.1		7.0		1.2
Raw Materials and Fuels		38.5		8.3		61.7		11.1		65.4		11.9		61.2		10.9		59.2		10.3
Petroleum & Derivatives		31.9		6.8		52.0		9.4		56.6		10.3		53.2		9.5		51.2		8.9
Others		6.6		1.4		9.7		1.7		8.8		1.6		8.0		1.4		8.0		1.4
Light Industrial Products		32.7		7.0		38.9		7.0		40.5		7.4		39.0		6.9		38.6		6.7
Heavy & Chemical Industrial Products		389.9		83.6		448.0		80.7		435.2		79.3		452.8		77.8		467.9		81.7
Electronic & Electronic Products		154.2		33.1		156.9		28.3		156.0		28.5		171.2		30.6		174.4		30.5
Chemicals & Chemical Products		47.5		10.2		59.1		10.6		59.6		10.9		64.4		11.5		65.6		11.5
Metal Goods		37.7		8.1		48.6		8.8		47.2		8.6		43.6		7.8		47.5		8.3
Machinery & Precision Equipment		44.0		9.4		54.5		9.8		55.7		10.2		55.3		9.9		57.9		10.1
Transport Equipment		103.4		22.2		124.7		22.5		112.1		20.5		113.1		20.2		116.5		20.3
Passenger Cars		31.8		6.8		40.9		7.4		42.4		7.7		44.3		7.9		44.8		7.8
Ship & Boat		47.1		10.1		54.6		9.8		38.2		7.0		36.2		6.5		38.7		6.8
Others		3.1		0.7		4.2		0.8		4.6		0.8		5.2		0.9		6.0		1.0
Total		466.4		100.0		555.2		100.0		547.9		100.0		559.6		100.0		572.7		100.0

(1) These entries are derived from customs clearance statistics. C.I.F. means that the price of goods includes insurance and freight costs.

(2) Preliminary

Source: The Bank of Korea; Korea Customs Service.

184

Imports by Major Commodity Groups (C.I.F.)(1)

	2010		As %  of 2010 Total		2011		As %  of 2011 Total		2012		As %  of 2012 Total		2013		As %  of 2013 Total		2014(2)		As %  of 2014 Total(2)
	(billions of dollars, except percentages)
Industrial Materials and Fuels		247.2		58.1		324.8		61.9		325.1		62.6		313.8		60.9		311.2		59.2
Crude Petroleum		68.7		16.2		100.8		19.2		108.3		20.8		99.4		19.3		94.9		18.1
Mineral		21.4		5.0		31.1		5.9		28.3		5.4		24.7		4.8		24.6		4.7
Chemicals		37.7		8.9		44.2		8.4		43.8		8.4		43.2		8.4		43.9		8.4
Iron & Steel Products		27.3		6.4		30.4		5.8		26.4		5.1		24.6		4.8		27.0		5.1
Non-ferrous Metal		12.6		3.0		15.1		2.9		12.6		2.4		12.5		2.4		12.8		2.4
Others		79.5		18.7		103.2		19.7		105.7		20.3		109.4		21.2		108.0		20.5
Capital Goods		135.7		31.9		146.5		27.9		140.3		27.0		144.2		28.0		149.0		28.3
Machinery & Precision Equipment		47.7		11.2		50.5		9.6		49.8		9.6		50.1		9.7		50.8		9.7
Electric & Electronic Machines		73.3		17.2		80.1		15.3		76.3		14.7		80.9		15.7		84.5		16.1
Transport Equipment		12.9		3.0		13.9		2.7		12.1		2.3		11.3		2.2		11.6		2.2
Others		1.8		0.4		2.0		0.4		2.1		0.4		1.9		0.4		2.1		0.4
Consumer Goods		42.3		9.9		53.1		10.1		54.2		10.4		58.2		11.3		65.3		12.4
Cereals		5.9		1.4		7.5		1.4		7.9		1.5		8.5		1.6		7.9		1.5
Goods for Direct Consumption		11.0		2.6		15.0		2.9		14.3		2.8		14.5		2.8		16.7		3.2
Consumer Durable Goods		16.2		3.8		18.6		3.5		19.4		3.7		21.0		4.1		24.7		4.7
Consumer Nondurable Goods		9.2		2.2		12.1		2.3		12.6		2.4		14.3		2.8		16.0		3.0
Total		425.2		100.0		524.4		100.0		519.6		100.0		515.6		100.0		525.5		100.0

(1) These entries are derived from customs clearance statistics. C.I.F. means that the price of goods includes insurance and freight costs.

(2) Preliminary.

Source: The Bank of Korea; Korea Customs Service.

In 2010, the Republic recorded a trade surplus of US$41.2 billion. Exports increased by 28.3% to US$466.4 billion in 2010 from US$363.5 billion in 2009, primarily due to increased demand for electronics products and automobiles from China and the emerging markets. Imports increased by 31.6% to US$425.2 billion from US$323.1 billion in 2009, primarily due to increases in domestic consumption and oil and raw material prices.

In 2011, the Republic recorded a trade surplus of US$30.8 billion. Exports increased by 19.0% to US$555.2 billion in 2011 from US$466.4 billion in 2010, primarily due to increased demand for mobile phones, consumer electronics products and automobiles from China and the emerging markets. Imports increased by 23.3% to US$524.4 billion in 2011 from US$425.2 billion in 2010, primarily due to an increase in oil and raw material prices.

In 2012, the Republic recorded a trade surplus of US$28.3 billion. Exports decreased by 1.3% to US$547.9 billion in 2012 from US$555.2 billion in 2011, primarily due to adverse economic conditions in European countries. Imports decreased by 0.9% to US$519.6 billion in 2012 from US$524.4 billion in 2011, primarily due to decreased investment spending.

In 2013, the Republic recorded a trade surplus of US$44.1 billion. Exports increased by 2.1% to US$559.7 billion in 2013 from US$547.9 billion in 2012, primarily due to increased demand for wireless communication devices, semiconductors and other information technology related products from the United States, China and the Southeast Asian nations. Imports decreased by 0.8% to US$515.6 billion in 2013 from US$519.6 billion in 2012, primarily due to decreased imports of oil, iron and steel.

Based on preliminary data, the Republic recorded a trade surplus of US$47.2 billion in 2014. Exports increased by 2.3% to US$572.7 billion in 2014 from US$559.6 billion in 2013, primarily due to increased

185

demand for semiconductors, wireless communication devices, iron and steel from the United States, the EU and the Southeast Asian nations. Imports increased by 1.9% to US$525.5 billion in 2014 from US$515.6 billion in 2013, primarily due to increased imports of cars, components for wireless communication devices and beef.

The following table sets forth the Republic’s exports trading partners:

Exports

	2010		As % of 2010 Total		2011		As % of 2011 Total		2012		As % of 2012 Total		2013		As % of 2013 Total		2014(1)		As % of 2014 Total(1)
	(millions of dollars, except percentages)
China		116,837.8		25.1		134,185.0		24.2		134,322.6		24.5		145,869.5		26.1		145,287.7		25.4
United States		49,816.1		10.7		56,207.7		10.1		58,524.6		10.7		62,052.5		11.1		70,284.9		12.3
Japan		28,176.3		6.0		39,679.7		7.1		38,796.1		7.1		34,662.3		6.2		32,183.8		5.6
Hong Kong		25,294.3		5.4		30,968.4		5.6		32,606.2		6.0		27,756.3		5.0		27,256.4		4.8
Singapore		15,244.2		3.3		20,839.0		3.8		22,887.9		4.2		22,289.0		4.0		23,749.9		4.1
Vietnam		9,652.1		2.1		13,464.9		2.4		15,946.0		2.9		21,087.6		3.8		22,351.7		3.9
Taiwan		14,830.5		3.2		18,206.0		3.3		14,814.9		2.7		15,699.1		2.8		15,077.4		2.6
India		11,434.6		2.5		12,654.1		2.3		11,922.0		2.2		11,375.8		2.0		12,782.5		2.2
Indonesia		8,897.3		1.9		13,564.5		2.4		13,955.0		2.5		11,568.2		2.1		11,360.7		2.0
Mexico		8,845.5		1.9		9,729.1		1.8		9,042.4		1.7		9,727.4		1.7		10,846.0		1.9
Australia		6,641.6		1.4		8,163.8		1.5		9,250.5		1.7		9,563.1		1.7		10,282.5		1.8
Russia		7,759.8		1.7		10,304.9		1.9		11,097.1		2.0		11,149.1		2.0		10,129.2		1.8
Germany		10,702.2		2.3		9,500.9		1.7		7,509.7		1.4		7,907.9		1.4		7,570.9		1.3
Others(2)		152,251.5		32.6		177,745.7		32.0		167,194.8		30.5		168,924.6		30.2		173,501.0		30.3
Total		466,383.8		100.0		555,213.7		100.0		547,869.8		100.0		559,632.4		100.0		572,664.6		100.0

(1) Preliminary

(2) Includes more than 200 countries and regions.

Source: The Bank of Korea; Korea Customs Service.

The following table sets forth the Republic’s imports trading partners:

Imports

	2010		As % of 2010 Total		2011		As % of 2011 Total		2012		As % of 2012 Total		2013		As % of 2013 Total		2014(1)		As % of 2014 Total(1)
	(millions of dollars, except percentages)
China		71,573.6		16.8		86,432.2		16.5		80,784.6		15.5		83,052.9		16.1		90,082.2		17.1
Japan		64,296.1		15.1		68,320.2		13.0		64,363.1		12.4		60,029.4		11.6		53,768.3		10.2
United States		40,402.7		9.5		44,569.0		8.5		43,341.0		8.3		41,511.9		8.1		45,283.3		8.6
Saudi Arabia		26,820.0		6.3		36,972.6		7.1		39,707.1		7.6		37,665.2		7.3		36,694.5		7.0
Qatar		11,915.5		2.8		20,749.4		4.0		25,504.7		4.9		25,873.8		5.0		25,723.1		4.9
Australia		20,456.2		4.8		26,316.3		5.0		22,987.9		4.4		20,784.6		4.0		20,413.0		3.9
Germany		14,304.9		3.4		16,962.6		3.2		17,645.4		3.4		19,336.0		3.8		21,298.8		4.0
Kuwait		10,850.1		2.6		16,959.6		3.2		18,297.1		3.5		18,725.1		3.6		16,892.0		3.2
Taiwan		13,647.1		3.2		14,693.6		2.8		14,012.0		2.7		14,632.6		2.8		15,689.8		3.0
United Arab Emirates		12,170.1		2.9		14,759.4		2.8		15,115.3		2.9		18,122.9		3.5		16,194.3		3.1
Indonesia		13,985.8		3.3		17,216.4		3.3		15,676.3		3.0		13,190.0		2.6		12,266.3		2.3
Malaysia		9,531.0		2.2		10,467.8		2.0		9,796.4		1.9		11,095.8		2.2		11,097.9		2.1
Others(2)		115,259.1		27.1		149,994.0		28.6		152,353.6		29.3		151,565.3		29.4		160,111.0		30.5
Total		425,212.2		100.0		524,413.1		100.0		519,584.5		100.0		515,585.5		100.0		525,514.5		100.0

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(1) Preliminary

(2) Includes more than 200 countries and regions.

Source: The Bank of Korea; Korea Customs Service.

In 2003, the outbreak of severe acute respiratory syndrome, or SARS, and the avian influenza in Asia (including China) and other parts of the world increased uncertainty about prospects for international trade and economic growth for affected countries, as well as world economic prospects in general. The avian influenza carried by migrating wild birds spread to several Asian countries, Russia, Romania and Turkey. In response to these outbreaks of avian influenza, the Government issued an advisory on disease prevention as of October 14, 2005 and conducted special monitoring of poultry farms. In addition, the Government continued to cooperate with regional and international efforts to develop and implement additional measures to contain and prevent SARS, the avian influenza and other diseases. Another outbreak of SARS, the avian influenza or similar incidents in the future may have an adverse effect on Korean and world economies and on international trade.

In recent years, the value of the Won relative to the U.S. dollar and Japanese Yen has fluctuated widely. An appreciation of the Won against the U.S. dollar and Japanese Yen increases the Won value of the Republic’s export sales and diminishes the price-competitiveness of export goods in foreign markets in U.S. dollar and Japanese Yen terms, respectively. However, it also decreases the cost of imported raw materials in Won terms and the cost in Won of servicing the Republic’s U.S. dollar and Japanese Yen denominated debt. In general, when the Won appreciates, export dependent sectors of the Korean economy, including automobiles, electronics and shipbuilding, suffer from the resulting pressure on the price-competitiveness of export goods, which may lead to reduced profit margins and loss in market share, more than offsetting a decrease in the cost of imported raw materials. If the Won continues to appreciate, the export dependent sectors of the Korean economy may suffer reduced profit margins or a net loss, which could result in a material adverse effect on the Korean economy.

Since the Government announced its plans to pursue free trade agreements, or FTAs, in 2003, the Republic has signed FTAs with key trading partners. The Republic has had bilateral FTAs in effect with Chile since 2004, Singapore since 2006, Peru since 2011, the United States since 2012, Turkey since 2013, Australia since 2014 and Canada since January 2015. The Republic has also signed bilateral FTAs with Columbia, China, New Zealand and Vietnam, which have yet to come into effect, and is currently in negotiations with a number of other key trading partners including Indonesia. In addition, the Republic has had regional FTAs in effect with the European Free Trade Association since 2006, Association of Southeast Asian Nations since 2009 and the European Union since 2011.

Non-Commodities Trade Balance

The non-commodities trade deficit was US$19.1 billion in 2010 and US$10.4 billion in 2011. The Republic had a non-commodities trade surplus of US$1.4 billion in 2012 and a non-commodities trade deficit of US$1.6 billion in 2013. Based on preliminary data, the Republic had a non-commodities trade deficit of US$3.5 billion in 2014.

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Foreign Currency Reserves

The foreign currency reserves are external assets that are readily available to and controlled by monetary authorities for meeting balance of payments financing needs and for other related purposes. The following table shows the Republic’s total official foreign currency reserves:

Total Official Reserves

	December 31,
	2010		2011		2012		2013		2014
	(millions of dollars)
Gold(1)	$	79.6	$	2,166.6	$	3,761.4	$	4,794.5	$	4,794.7
Foreign Exchange(2)		286,926.4		298,232.9		316,897.7		335,647.5		353,600.5
Total Gold and Foreign Exchange		287,006.0		300,399.5		320,659.1		340,442.0		358,395.2
Reserve Position at IMF		1,024.7		2,556.2		2,783.6		2,527.7		1,917.1
Special Drawing Rights		3,539.9		3,446.7		3,525.6		3,489.9		3,280.5
Total Official Reserves	$	291,570.7	$	306,402.5	$	326,968.4	$	346,459.6	$	363,592.7

(1) For this purpose, domestically-owned gold is valued at US$42.22 per troy ounce (31.1035 grams) and gold deposited overseas is calculated at cost of purchase.

(2) More than 95% of the Republic’s foreign currency reserves are comprised of convertible foreign currencies.

Source: The Bank of Korea; International Monetary Fund

The Government’s foreign currency reserves increased to US$262.2 billion as of December 31, 2007 from US$8.9 billion as of December 31, 1997, primarily due to continued balance of trade surpluses and capital inflows. In 2008, the Government’s foreign currency reserves decreased, falling to US$201.2 billion as of December 31, 2008, partially as a result of the Government’s use of the foreign currency reserve to provide foreign currency liquidity to Korean financial institutions. The Government’s foreign currency reserves increased to US$270.0 billion as of December 31, 2009, US$291.6 billion as of December 31, 2010, US$306.4 billion as of December 31, 2011, US$327.0 billion as of December 31, 2012, US$346.5 billion as of December 31, 2013 and US$363.6 billion as of December 31, 2014, primarily due to continued trade surpluses and capital inflows. The amount of the Government’s foreign currency reserve was US$362.8 billion as of March 31, 2015.

Government Finance

The Ministry of Strategy and Finance prepares the Government budget and administers the Government’s finances.

The Government’s fiscal year commences on January 1. The Government must submit the budget, which is drafted by the Minister of Strategy and Finance and approved by the President of the Republic, to the National Assembly not later than 90 days prior to the start of the fiscal year and may submit supplementary budgets revising the original budget at any time during the fiscal year.

2013 budgeted revenues increased by 4.6% to W326.9 trillion from W312.5 trillion in 2012, led by an increase in budgeted tax revenues (including revenues from income tax and transaction tax on derivatives). 2013 budgeted expenditures and net lending increased by 7.1% to W315.1 trillion from W294.3 trillion in 2012, led by increases in budgeted expenditures on public health, social security, public assistance and education. The 2013 budget anticipated a W11.8 billion budget surplus.

2014 budgeted revenues increased by 3.7% to W338.9 trillion from W326.9 trillion in 2013, led by an increase in budgeted tax revenues (including revenues from income tax and value added tax). 2014 budgeted

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expenditures and net lending increased by 3.3% to W325.4 trillion from W315.1 trillion in 2013, led by increases in budgeted expenditures on social security, public assistance, childcare and welfare services for senior citizens. The 2014 budget anticipated a W13.5 billion budget surplus.

The following table shows consolidated Government revenues and expenditures:

Consolidated Central Government Revenues and Expenditures

	Actual											Budget
	2009		2010		2011		2012		2013			2012		2013		2014
	(billions of Won)
Total Revenues		250,810		270,923		292,323		311,456		314,438			312,461		326,910		338,867
Current Revenues		248,278		268,540		289,797		307,754		311,136			307,477		321,898		334,653
Total Tax Revenues		198,438		213,319		231,273		246,918		248,046			246,256		256,765		268,415
Taxes on income, profits and capital gains		69,675		74,730		87,161		91,699		91,674			90,136		95,742		100,400
Social security contributions		33,896		35,601		38,892		43,904		46,140			40,498		46,367		51,962
Tax on property		7,171		7,772		8,713		8,832		8,591			8,999		10,367		9,754
Taxes on goods and services		63,496		71,035		71,519		77,811		77,642			79,474		78,498		80,924
Taxes on international trade and transaction		9,169		10,666		10,990		9,816		10,562			11,611		10,269		10,551
Other tax		15,030		13,514		13,998		14,857		13,438			15,358		15,522		14,824
Non-Tax Revenues		49,840		55,221		58,524		60,836		63,089			61,221		65,133		66,238
Operating surpluses of departmental enterprise sales and property income		24,331		23,173		24,675		25,242		24,591			25,329		25,282		23,999
Administration fees & charges and non-industrial sales		5,847		6,345		6,973		7,364		8,537			7,400		8,130		8,437
Fines and forfeits		14,979		15,730		17,180		17,488		18,164			17,666		19,822		20,769
Contributions to government employee pension fund		6,324		7,213		7,303		8,134		8,776			8,572		9,067		10,034
Current revenue of non-financial public enterprises		2,802		2,760		2,393		2,608		3,021			2,254		2,254		2,999
Capital Revenues		2,532		2,383		2,527		3,702		3,302			4,984		5,012		4,214
Total Expenditures and Net Lending		268,431		254,231		273,694		292,977		300,238			294,319		315,116		325,378
Total Expenditures		250,382		251,146		269,768		286,921		302,036			289,644		311,231		320,075
Current Expenditures		215,134		216,937		235,458		252,620		268,019			244,355		275,757		287,226
Expenditure on goods and service		38,837		49,821		52,989		55,384		57,769			47,415		63,675		64,470
Interest payment		15,961		13,387		14,566		14,239		13,386			12,406		13,660		14,439
Subsidies and other current transfers		151,791		151,030		165,233		179,433		193,451			178,378		195,048		204,638
Current expenditure of non-financial public enterprises		3,100		2,699		2,670		3,564		3,414			3,156		3,373		3,679
Capital Expenditures		35,248		34,209		34,310		34,301		34,017			45,289		35,474		32,850
Net Lending		18,049		3,084		3,926		6,056		(1,798	)		4,675		3,885		5,303

Source: Ministry of Strategy and Finance; The Bank of Korea; Korea National Statistical Office

The consolidated Government account consists of a General Account, Special Accounts (including a non-financial public enterprise special account) and Public Funds. The Government segregates the accounts of certain functions of the Government into Special Accounts and Public Funds for more effective administration and fiscal

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control. The Special Accounts and Public Funds relate to business type activities, such as economic development, road and railway construction and maintenance, monopolies, and communications developments and the administration of loans received from official international financial organizations and foreign governments.

Revenues derive mainly from national taxes and non-tax revenues. Taxes in Korea can be roughly classified into the following types:

• income tax and capital gains tax,

• property tax,

• value-added tax,

• customs duty tax, and

• other taxes.

Income tax and capital gains tax are imposed on income derived from labor, business operation and ownership of assets and profits derived from capital appreciation. Income tax and capital gains tax, depending on the type of taxpayer, can be further classified into corporate income tax and individual income tax. Property tax is imposed on exchange or ownership of property and includes inheritance tax and gift tax. Value-added tax is imposed on value added to goods and services. Customs duty tax is imposed on imported goods. Other taxes include tax on certain securities transactions and a stamp tax for certain documents.

Expenditures include general administration, national defense, community service, education, health, social security, certain annuities and pensions and local finance, which involves the transfer of tax revenues to local governments.

For 2009, the Republic recorded total revenues of W250.8 trillion and total expenditures and net lending of W272.9 trillion in 2009. The Republic had a fiscal deficit of W17.6 trillion in 2009.

For 2010, the Republic recorded total revenues of W270.9 trillion and total expenditures and net lending of W254.2 trillion in 2010. The Republic had a fiscal surplus of W16.7 trillion in 2010.

For 2011, the Republic recorded total revenues of W292.3 trillion and total expenditures and net lending of W273.7 trillion in 2011. The Republic had a fiscal surplus of W18.6 trillion in 2011.

For 2012, the Republic recorded total revenues of W311.5 trillion and total expenditures and net lending of W293.0 trillion. The Republic had a fiscal surplus of W18.5 trillion in 2012.

Based on preliminary data, the Republic recorded total revenues of W314.4 trillion and total expenditures and net lending of W300.2 trillion in 2013. The Republic had a fiscal surplus of W14.2 trillion in 2013.

Debt

The Government estimates that the total outstanding debt of the Government (including guarantees by the Government) as of December 31, 2012 amounted to approximately W457.9 trillion, an increase of 4.5% over the previous year. The Government estimates that the total outstanding debt of the Government (including guarantees by the Government) as of December 31, 2013 amounted to approximately W497.0 trillion, an increase of 8.5% over the previous year. The Ministry of Strategy and Finance administers the national debt of the Republic.

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External and Internal Debt of the Government

The following table sets out, by currency and the equivalent amount in U.S. Dollars, the estimated outstanding direct external debt of the Government as of December 31, 2013:

Direct External Debt of the Government

	Amount in Original Currency		Equivalent Amount in U.S. Dollars(1)
	(millions)
US$	US$	6,029.5	US$	6,029.5
Japanese Yen (¥)	¥	923.5		8.8
Euro (EUR)	EUR	875.2		1,207.7
Total			US$	7,246.0

(1) Amounts expressed in currencies other than US$ are converted to US$ at the arbitrage rate announced by the Seoul Money Brokerage Services, Ltd. in effect on December 31, 2013.

The following table summarizes, as of December 31 of the years indicated, the outstanding direct internal debt of the Republic:

Direct Internal Debt of the Government

	(billions of Won)
2009		331,904.1
2010		360,804.5
2011		390,249.4
2012		414,213.5
2013		453,674.0

The following table sets out all guarantees by the Government of indebtedness of others:

Guarantees by the Government

	December 31,
	2009		2010		2011		2012		2013
	(billions of Won)
Domestic		28,292.4		33,291.7		33,799.1		32,783.6		32,978.5
External(1)		1,508.4		1,508.3		1,258.6		—		—
Total		29,800.8		34,800.0		35,057.7		32,783.6		32,978.5

(1) Converted to Won at foreign exchange banks’ telegraphed transfer selling rates to customers or the market average exchange rates in effect on December 31 of each year.

For further information on the outstanding indebtedness, including guarantees, of the Republic, see “—Tables and Supplementary Information”.

191

External Liabilities

The following tables set out certain information regarding the Republic’s external liabilities calculated under the criteria based on the sixth edition of Balance of Payment Manual, or BPM6, published by the International Monetary Fund in December 2010 and implemented by the Government in December 2013. Under BPM6, in particular, prepayments received in connection with the construction of ships are excluded from the external debt.

	December 31,
	2009		2010		2011		2012		2013
	(billions of dollars)
Long-term Debt		195.9		219.5		260.3		281.0		300.8
General Government		34.2		50.5		59.8		60.8		63.0
Monetary Authorities		21.3		18.4		14.2		21.2		29.2
Banks		64.6		71.0		93.4		97.8		101.8
Other Sectors		75.8		79.6		92.9		101.2		106.8
Short-term Debt		148.7		136.5		139.8		128.0		115.3
General Government		0.0		0.2		0.5		0.0		0.0
Monetary Authorities		11.7		10.3		8.9		14.9		10.8
Banks		115.2		101.9		102.9		85.4		76.4
Other Sectors		21.8		24.0		27.5		27.7		28.1
Total External Liabilities		344.6		355.9		400.0		408.9		416.1

Debt Record

The Government has always paid when due the full amount of principal of, interest on, and amortization of sinking fund requirements of, all of its indebtedness.

Tables and Supplementary Information

A. External Debt of the Government

(1) External Bonds of the Government

Series	Issue Date	Maturity Date	Interest Rate (%)		Currency		Original Principal Amount		Principal Amount Outstanding as of December 31, 2013
2004-001	September 22, 2004	September 22, 2014		4.875		USD		1,000,000,000		1,000,000,000
2005-001	November 2, 2005	November 3, 2025		5.625		USD		400,000,000		400,000,000
2005-002	November 2, 2005	November 2, 2015		3.625		EUR		500,000,000		500,000,000
2006-001	December 7, 2006	December 7, 2016		5.125		USD		500,000,000		500,000,000
2006-002	December 7, 2006	December 7, 2021		4.25		EUR		375,000,000		375,000,000
2009-001	April 16, 2009	April 16, 2014		5.75		USD		1,500,000,000		1,500,000,000
2009-002	April 16, 2009	April 16, 2019		7.125		USD		1,500,000,000		1,500,000,000
2013-001	September 11, 2013	September 11, 2023		3.875		USD		1,000,000,000		1,000,000,000
Total External Bonds in Original Currencies									USD	5,900,000,000
									EUR	875,000,000
Total External Bonds in Equivalent Amount of Won(1)									W	7,500,497,500,000

(1) U.S. dollar amounts are converted to Won amounts at the rate of US$1.00 to W1,055.3, the market average exchange rate in effect on December 31, 2013, as announced by Seoul Money Brokerage Services, Ltd. Euro amounts are converted to Won amounts at the rate of EUR1.00 to W1,456.26, the market average exchange rate in effect on December 31, 2013, as announced by Seoul Money Brokerage Services, Ltd.

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(2) External Borrowings of the Government

a. Borrowings in U.S. Dollars

Date of Borrowing	Original Maturity (Years)		Interest Rate (%)		Original Principal Amount (USD)		Principal Amount Outstanding as of December 31, 2013 (USD)
April 12, 1973		42		3		96,300,000		6,017,132
April 12, 1973		43		3		5,300,000		495,625
January 28, 1974		40		3		5,000,000		162,377
April 19, 1974		40		3		2,800,000		123,762
September 11, 1974		41		3		25,700,000		1,881,271
September 13, 1975		41		3		5,000,000		491,472
September 13, 1975		41		3		5,000,000		490,934
September 13, 1975		41		3		5,000,000		709,618
February 18, 1976		40		3		11,900,000		1,064,310
February 18, 1976		40		3		27,900,000		2,322,044
February 18, 1976		40		3		23,400,000		3,331,028
February 18, 1976		40		3		90,800,000		8,264,485
July 21, 1977		41		3		59,500,000		8,968,362
July 21, 1977		40		3		43,800,000		5,296,487
June 7, 1979		30		3		40,000,000		7,254,852
January 25, 1980		40		3		30,000,000		6,348,176
May 18, 1981		40		3		27,000,000		6,392,174
October 12, 1994		20		6.25		1,640,370,000		69,872,617
Subtotal in Original Currency							USD	129,486,726
Subtotal in Equivalent Amount of Won(1)							W	136,647,341,680

(1) U.S. dollar amounts are converted to Won amounts at the rate of US$1.00 to W1,055.3, the market average exchange rate in effect on December 31, 2013, as announced by Seoul Money Brokerage Services, Ltd.

b. Borrowings in Euro

Date of Borrowing	Original Maturity (Years)		Interest Rate (%)		Original Principal Amount (EUR)		Principal Amount Outstanding as of December 31, 2013 (EUR)
March 27, 1985		30		2.2		6,000,000		219,399
Subtotal in Original Currency							EUR	219,399
Subtotal in Equivalent Amount of Won(1)							W	319,502,410

(1) Euro amounts are converted to Won amounts at the rate of EUR1.00 to W1,456.26, the market average exchange rate in effect on December 31, 2013, as announced by Seoul Money Brokerage Services, Ltd.

193

c. Borrowings in Japanese Yen

Date of Borrowing	Original Maturity (Years)		Interest Rate (%)		Original Principal Amount (JPY)		Principal Amount Outstanding  as of December 31, 2013 (JPY)
October 31, 1990		25		4		4,320,000,000		450,644,000
October 31, 1990		25		4		5,414,000,000		239,496,000
October 31, 1990		25		4		2,160,000,000		233,356,000
Subtotal in Original Currency							JPY	923,496,000
Subtotal in Equivalent Amount of Won(1)							W	9,277,994,920
Total External Borrowings in Equivalent Amount of Won							W	146,244,839,010

(1) Japanese yen amounts are converted to Won amounts at the rate of JPY100.00 to W1,004.66, the market average exchange rate in effect on December 31, 2013, as announced by Seoul Money Brokerage Services, Ltd.

B. External Guaranteed Debt of the Government

None.

C. Internal Debt of the Government

Title	Range of Interest Rates		Range of Years of Issue		Range of Years of Original Maturity		Principal Amounts Outstanding as of December 31, 2013
	(%)						(billions of Won)
1. Bonds
Interest-Bearing Treasury Bond for Treasury Bond Management Fund		1.125-5.75		2004-2013		2014-2042		400,693.0
Interest-Bearing Treasury Bond for National Housing I		2.25-3.0		2004-2013		2009-2018		47,792.6
Interest-Bearing Treasury Bond for National Housing II		0.0-3.0		1989-2012		2009-2030		2,865.7
Interest-Bearing Treasury Bond for National Housing III		0		2005		2015		594.2
Non-interest-Bearing Treasury Bond for Contribution to International Organizations(1)		—		1967-1985		—		11.3
Total Bonds								451,956.8
2. Borrowings
Borrowings from The Bank of Korea		2.68		2013		2014		1,117.2
Borrowings from the Sports Promotion Fund		3.36		2011		2014		20.0
Borrowings from the Korea Credit Guarantee Fund		2.74-2.8		2012		2014		350.0
Borrowings from Korea Technology Finance Corporation		2.74-3.33		2012		2014		150.0
Borrowings from the Government Employees’ Pension Fund		2.74-3.88		2011-2012		2014-2015		60.0
Borrowings from the Film Industry Development Fund		3.41		2011		2014		2.0
Total Borrowings								1,717.2
Total Internal Funded Debt								453,674.0

(1) Interest Rates and Years of Maturity not applicable.

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D. Internal Guaranteed Debt of the Government

Title	Range of Interest Rates		Range of Years of Issue		Range of Years of Original Maturity		Principal Amounts Outstanding as of December 31, 2013
	(%)						(billions of Won)
1. Bonds of Government-Affiliated Corporations
Korea Deposit Insurance Corporation		2.84-6.32		2009-2013		2014-2018		22,520.0
KAMCO		Floating-5.27		2009-2011		2014		2,114.4
Korea Student Aid Foundation		Floating-5.26		2010-2013		2014-2032		8,270.0
Total Bonds								32,904.4
2. Borrowings of Government-Affiliated Corporations
Rural Development Corporation and Federation of Farmland		5.5		1989		2023		74.1
Total Borrowings								74.1
Total Internal Guaranteed Debt								32,978.5

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DESCRIPTION OF THE SECURITIES

Description of Debt Securities

We will issue debt securities under a fiscal agency agreement or agreements. The description below summarizes the material provisions of the debt securities and the fiscal agency agreement. Since it is only a summary, the description may not contain all of the information that may be important to you as a potential investor in the debt securities. Therefore, we urge you to read the form of fiscal agency agreement and the form of global debt security before deciding whether to invest in the debt securities. We have filed a copy of these documents with the Securities and Exchange Commission as exhibits to the registration statement of which this prospectus is a part. You should refer to such exhibits for more complete information.

The financial terms and other specific terms of your debt securities will be described in the prospectus supplement relating to your debt securities. The description in the prospectus supplement will supplement this description or, to the extent inconsistent with this description, replace it.

We will appoint a fiscal agent or agents in connection with debt securities whose duties will be governed by the fiscal agency agreement. We may replace the fiscal agent or appoint different fiscal agents for different series of debt securities.

General Terms of the Debt Securities

We may issue debt securities in separate series at various times. The Republic may irrevocably guarantee the payment of principal of, and interest on, one or more series of debt securities. The prospectus supplement that relates to your debt securities will specify some or all of the following terms:

• the aggregate principal amount;

• the currency of denomination and payment;

• any limitation on principal amount and authorized denominations;

• the percentage of their principal amount at which the debt securities will be issued;

• the maturity date or dates;

• the interest rate for the debt securities and, if variable, the method by which the interest rate will be calculated;

• whether any amount payable in respect of the debt securities will be determined based on an index or formula, and how any such amount will be determined;

• the dates from which interest, if any, will accrue for payment of interest and the record dates for any such interest payments;

• where and how we will pay principal and interest;

• whether and in what circumstances the debt securities may be redeemed before maturity;

• any sinking fund or similar provision;

• whether any part or all of the debt securities will be in the form of a global security and the circumstances in which a global security is exchangeable for certificated securities;

• if issued in certificated form, whether the debt securities will be in bearer form with interest coupons, if any, or in registered form without interest coupons, or both forms, and any restrictions on exchanges from one form to the other;

• whether any of the terms set out herein will differ for the debt securities;

• whether the Republic will irrevocably guarantee the payment of principal of, and interest on, the debt securities; and

• other specific provisions.

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Depending on the terms of the debt securities we issue, the prospectus supplement relating to the debt securities may also describe applicable U.S. federal income tax and other considerations additional to the disclosure in this prospectus.

Unless otherwise specified in the applicable prospectus supplement, we will maintain at an office in the Borough of Manhattan, The City of New York, a register for the registration of transfers of debt securities issued in registered form.

Payments of Principal, Premium and Interest

On every payment date specified in the relevant prospectus supplement, we will pay the principal, premium and/or interest due on that date to the registered holder of the relevant debt security at the close of business on the related record date. We will make all payments at the place and in the currency set out in the prospectus supplement. Unless otherwise specified in the relevant prospectus supplement or the debt securities, we will make payments in U.S. dollars at the New York office of the fiscal agent or, outside the United States, at the office of any paying agent. Unless otherwise specified in the applicable prospectus supplement or debt securities, we will pay interest by check, payable to the registered holder.

We will make any payments on debt securities in bearer form at the offices and agencies of the fiscal agent or any other paying agent outside the United States as we may designate. At the option of the holder of the bearer debt securities, we will make such payments by check or by transfer to an account maintained by the holder with a bank located outside of the United States. We will not make payments on bearer debt securities at the corporate trust office of the fiscal agent in the United States or at any other paying agency in the United States. In addition, we will not make any payment by mail to an address in the United States or by transfer to an account maintained by a holder of bearer debt securities with a bank in the United States. Nevertheless, we will make payments on a bearer debt security denominated and payable in U.S. dollars at an office or agency in the United States if:

• payment outside the United States is illegal or effectively precluded by exchange controls or other similar restrictions; and

• the payment is then permitted under United States law, without material adverse consequences to us.

If we issue bearer debt securities, we will designate the offices of at least one paying agent outside the United States as the location for payment.

Repayment of Funds; Prescription

If no one claims money paid by us to the fiscal agent for the payment of principal or interest in respect of any series of debt securities for two years after the payment was due and payable, the fiscal agent or paying agent will repay the money to us. After such repayment, the fiscal agent or paying agent will not be liable with respect to the amounts so repaid, and you may look only to us for any payment under the debt securities.

Under Korean law, you will not be permitted to file a claim against us for payment of principal or interest on any series of debt securities unless you do so within five years, in the case of principal, and two years, in the case of interest, from the date on which payment was due.

Global Securities

The prospectus supplement relating to a series of debt securities will indicate whether any of that series of debt securities will be represented by a global security. The prospectus supplement will also describe any unique specific terms of the depositary arrangement with respect to that series. Unless otherwise specified in the prospectus supplement, we anticipate that the following provisions will apply to depositary arrangements.

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Registered Ownership of the Global Security

The global security will be registered in the name of a depositary identified in the prospectus supplement, or its nominee, and will be deposited with the depositary, its nominee or a custodian. The depositary, or its nominee, will therefore be considered the sole owner or holder of debt securities represented by the global security for all purposes under the fiscal agency agreement. Except as specified below or in the applicable prospectus supplement, beneficial owners:

• will not be entitled to have any of the debt securities represented by the global security registered in their names;

• will not receive physical delivery of any debt securities in definitive form;

• will not be considered the owners or holders of the debt securities;

• must rely on the procedures of the depositary and, if applicable, any participants (institutions that have accounts with the depositary or a nominee of the depositary, such as securities brokers and dealers) to exercise any rights of a holder; and

• will receive payments of principal and interest from the depositary or its participants rather than directly from us.

We understand that, under existing industry practice, the depositary and participants will allow beneficial owners to take all actions required of, and exercise all rights granted to, the registered holders of the debt securities.

We will register debt securities in the name of a person other than the depositary or its nominee only if:

• the depositary for a series of debt securities is unwilling or unable to continue as depositary; or

• we determine, in our sole discretion, not to have a series of debt securities represented by a global security.

In either such instance, an owner of a beneficial interest in a global security will be entitled to registration of a principal amount of debt securities equal to its beneficial interest in its name and to physical delivery of the debt securities in definitive form.

Beneficial Interests in and Payments on a Global Security

Only participants, and persons that may hold beneficial interests through participants, can own a beneficial interest in the global security. The depositary keeps records of the ownership and transfer of beneficial interests in the global security by its participants. In turn, participants keep records of the ownership and transfer of beneficial interests in the global security by other persons (such as their customers). No other records of the ownership and transfer of beneficial interests in the global security will be kept.

All payments on a global security will be made to the depositary or its nominee. When the depositary receives payment of principal or interest on the global security, we expect the depositary to credit its participants’ accounts with amounts that correspond to their respective beneficial interests in the global security. We also expect that, after the participants’ accounts are credited, the participants will credit the accounts of the owners of beneficial interests in the global security with amounts that correspond to the owners’ respective beneficial interests in the global security.

The depositary and its participants establish policies and procedures governing payments, transfers, exchanges and other important matters that affect owners of beneficial interests in a global security. The

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depositary and its participants may change these policies and procedures from time to time. We have no responsibility or liability for the records of ownership of beneficial interests in the global security, or for payments made or not made to owners of such beneficial interests. We also have no responsibility or liability for any aspect of the relationship between the depositary and its participants or for any aspect of the relationship between participants and owners of beneficial interests in the global security.

Bearer Securities

We may issue debt securities in a series in the form of one or more bearer global debt securities deposited with a common depositary for the Euroclear and Clearstream, or with a nominee identified in the applicable prospectus supplement. The specific terms and procedures, including the specific terms of the depositary arrangement, with respect to any portion of a series of debt securities to be represented by a global security will be described in the applicable prospectus supplement.

Additional Amounts

We will make all payments of principal of, and premium and interest, if any, on the debt securities without withholding or deducting any present or future taxes imposed by the Republic or any of its political subdivisions, unless required by law. If Korean law requires us to deduct or withhold taxes, we will pay additional amounts as necessary to ensure that you receive the same amount as you would have received without such withholding or deduction.

We will not pay, however, any additional amounts if you are liable for Korean tax because:

• you are connected with the Republic other than by merely owning the debt security or receiving income or payments on the debt security;

• you failed to complete and submit a declaration of your status as a non-resident of the Republic after we or the relevant tax authority requested you to do so; or

• you failed to present your debt security for payment within 30 days of when the payment is due or, if the fiscal agent did not receive the money prior to the due date, the date notice is given to holders that the fiscal agent has received the full amount due to holders. Nevertheless, we will pay additional amounts to the extent you would have been entitled to such amounts had you presented your debt security for payment on the last day of the 30-day period.

We will not pay any additional amounts for taxes on the debt securities except for taxes payable through deduction or withholding from payments of principal, premium or interest. Examples of the types of taxes for which we will not pay additional amounts include the following: estate or inheritance taxes, gift taxes, sales or transfer taxes, personal property or related taxes, assessments or other governmental charges. We will also not pay any additional amounts for taxes imposed pursuant to Sections 1471 through 1474 of the U.S. Internal Revenue Code of 1986, as amended, U.S. Treasury regulations or administrative guidance promulgated thereunder or any law implementing an intergovernmental approach thereto (“FATCA”). We will pay stamp or other similar taxes that may be imposed by the Republic, the United States or any political subdivision or taxing authority in one of those two countries on the fiscal agency agreement or be payable in connection with the issuance of the debt securities.

Status of Debt Securities

The debt securities will:

• constitute our direct, unconditional, unsecured and unsubordinated obligations;

• rank at least equally in right of payment among themselves, regardless of when issued or currency of payment; and

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• rank at least equally in right of payment with all of our other unsecured and unsubordinated obligations, subject to certain statutory exceptions under Korean law.

Negative Pledge Covenant

If any debt securities are outstanding, we will not create or permit any security interests on our assets as security for any of our indebtedness or guarantees issued by us, unless the security interest also secures our obligations under the debt securities.

We may, however, create or permit a security interest:

• on any promissory debt securities or commercial paper discounted or otherwise provided as security to or issued or held by us created in favor of The Bank of Korea in the normal operation of The Bank of Korea’s discount facilities or facilities for the funding of loans by us to our customers; or

• on any asset (or documents of title to such asset) incurred when the asset was purchased or improved to secure payment of the cost of the activity; or

• of a statutory nature arising in the ordinary course of our business but unrelated to our activities of borrowing or raising money; or

• on any real estate owned by us imposed by a tenant of such real estate as security for repayment of any key money paid by the tenant; or

• arising by operation of Korean law or given preference by law following our failure to meet an obligation, although we will not permit such a security interest to exist for more than 30 days.

Events of Default

Unless otherwise specified in the applicable prospectus supplement in connection with a particular offering of debt securities, each of the following constitutes an event of default with respect to any series of debt securities:

1. Non-Payment: we do not pay principal or interest or premium or deposit any sinking fund payment on any debt securities of the series when due and such failure to pay continues for 30 days.

2. Breach of Other Obligations: we fail to observe or perform any of the covenants in the series of debt securities (other than non-payment) for 60 days after written notice of the default is delivered to us at the corporate trust office of the fiscal agent in New York City by holders representing at least 10% of the aggregate principal amount of the debt securities of the series.

3. Cross Default and Cross Acceleration:

• we default on any External Indebtedness, and, as a result, becomes obligated to pay an amount equal to or greater than US$10,000,000 in aggregate principal amount prior to its due date; or

• we fail to pay when due, including any grace period, any of our External Indebtedness in aggregate principal amount equal to or greater than US$10,000,000 or we fail to pay when requested and required by the terms thereof any guarantee for External Indebtedness of another person equal to or greater than US$10,000,000 in aggregate principal amount.

4, Moratorium/Default:

• the Republic declares a general moratorium on the payment of its External Indebtedness, including obligations under guarantees;

• the Republic becomes liable to repay prior to maturity any amount of External Indebtedness, including obligations under guarantees, as a result of a default under such External Indebtedness or obligations; or

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• the international monetary reserves of the Republic become subject to a security interest or segregation or other preferential arrangement for the benefit of any creditors.

5. Bankruptcy:

• we are declared bankrupt or insolvent by any court or administrative agency with jurisdiction over us;

• we pass a resolution to apply for bankruptcy or to request the appointment of a receiver or trustee or similar official in insolvency;

• a substantial part of our assets are liquidated; or

• we cease to conduct the banking business.

6. Cessation of Government Control or Failure of Support: the Republic ceases to (directly or indirectly) control us or fails to provide financial support for us as required under Article 32 of the KDB Act as of the issue date of the debt securities of such series.

For purposes of the foregoing, “External Indebtedness” means any obligation for the payment or repayment of money borrowed that is denominated in a currency other than the currency of the Republic.

As used in paragraph 6 above, “control” means the acquisition or control of a majority of our voting share capital or the right to appoint and/or remove all or the majority of the members of our board of directors or other governing body, whether obtained directly or indirectly, and whether obtained by ownership of share capital, the possession of voting rights, contract or otherwise.

If an event of default occurs, any holder may declare the principal amount of debt securities that it holds to be immediately due and payable by written notice to us and the fiscal agent.

You should note that:

• despite the procedure described above, no debt securities may be declared due and payable if we cure the applicable event of default before we receive the written notice from the debt security holder;

• we are not required to provide periodic evidence of the absence of defaults; and

• the fiscal agency agreement does not require us to notify holders of the debt securities of an event of default or grant any debt security holder a right to examine the security register.

Modifications and Amendments; Debt Securityholders’ Meetings

Each holder of a series of debt securities must consent to any amendment or modification of the terms of that series of debt securities or the fiscal agency agreement that would, among other things:

• change the stated maturity of the principal of the debt securities or any installment of interest;

• reduce the principal amount of such series of debt securities or the portion of the principal amount payable upon acceleration of such debt securities;

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• change the debt security’s interest rate or premium payable;

• change the currency of payment of principal, interest or premium;

• amend either the procedures provided for a redemption event or the definition of a redemption event;

• shorten the period during which we are not allowed to redeem the debt securities or grant us a right to redeem the debt securities which we previously did not have; or

• reduce the percentage of the outstanding principal amount needed to modify or amend the fiscal agency agreement or the terms of such series of debt securities.

We may, with the exception of the above changes, with the consent of the holders of at least 66 ²/3% in principal amount of the debt securities of a series that are outstanding, modify and amend other terms of that series of debt securities.

We may at any time call a meeting of the holders of a series of debt securities to seek the holders of the debt securities’ approval of the modification, or amendment, or obtain a waiver, of any provision of that series of debt securities. The meeting will be held at the time and place in the Borough of Manhattan in New York City as determined by the fiscal agent. The notice calling the meeting must be given at least 30 days and not more than 60 days prior to the meeting.

While an event of default with respect to a series of debt securities is continuing, holders of at least 10% of the aggregate principal amount of that series of debt securities may compel the fiscal agent to call a meeting of all holders of debt securities of that series.

Holders of debt securities who hold, in the aggregate, a majority in principal amount of the debt securities of the series that are outstanding at the time will constitute a quorum at a meeting. At the reconvening of any meeting adjourned for a lack of a quorum, the persons entitled to vote 25% in principal amount of the debt securities of the series that are outstanding at the time will constitute a quorum for taking any action set out in the original notice. To vote at a meeting, a person must either hold outstanding debt securities of the relevant series or be duly appointed as a proxy for a debt securityholder. The fiscal agent will make all rules governing the conduct of any meeting.

The fiscal agency agreement and a series of debt securities may be modified or amended, without the consent of the holders of the debt securities, to:

• add covenants made by us that benefit holders of the debt securities;

• surrender any right or power given to us;

• secure the debt securities;

• permit registered securities to be exchanged for bearer securities or relax or eliminate restrictions on the payment of principal, premium or interest on bearer securities to the extent permitted under United States Department of Treasury regulations, provided that holders of the debt securities do not suffer any adverse tax consequences as a result; and

• cure any ambiguity or correct or supplement any defective provision in the fiscal agency agreement or the debt securities, without materially and adversely affecting the interests of the holders of the debt securities.

Fiscal Agent

The fiscal agency agreement governs the duties of each fiscal agent. We may maintain bank accounts and a banking relationship with each fiscal agent. The fiscal agent is our agent and does not act as a trustee for the holders of the debt securities.

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Further Issues of Debt Securities

We may, without the consent of the holders of the debt securities, create and issue additional debt securities with the same terms and conditions as any series of debt securities (or that are the same except for the amount of the first interest payment and for the interest paid on the series of debt securities prior to the issuance of the additional debt securities). We may consolidate such additional debt securities with the outstanding debt securities to form a single series.

Description of Warrants

The description below summarizes some of the provisions of warrants for the purchase of debt securities that we may issue from time to time and of the warrant agreement. Copies of the forms of warrants and the warrant agreement are or will be filed as exhibits to the registration statement of which this prospectus is a part. Since it is only a summary, the description may not contain all of the information that is important to you as a potential investor in the warrants.

The description of the warrants that will be contained in the prospectus supplement will supplement this description and, to the extent inconsistent with this description, replace it.

General Terms of the Warrants

Each series of warrants will be issued under a warrant agreement to be entered into between us and a bank or trust company, as warrant agent. The prospectus supplement relating to the series of warrants will describe:

• the terms of the debt securities purchasable upon exercise of the warrants, as described above under “—Description of Debt Securities—General Terms of the Debt Securities”;

• the principal amount of debt securities purchasable upon exercise of one warrant and the exercise price;

• the procedures and conditions for the exercise of the warrants;

• the dates on which the right to exercise the warrants begins and expires;

• whether and under what conditions the warrants may be terminated or canceled by us;

• whether and under what conditions the warrants and any debt securities issued with the warrants will be separately transferable;

• whether the warrants will be issued in bearer or registered form;

• whether the warrants will be exchangeable between registered and bearer form, and, if issued in registered form, where they may be transferred and registered; and

• other specific provisions.

Terms Applicable to Debt Securities and Warrants

Governing Law

The fiscal agency agreement, any warrant agreement and the debt securities and any warrants will be governed by the laws of the State of New York without regard to any principles of New York law requiring the application of the laws of another jurisdiction. Nevertheless, all matters governing our authorization, execution and delivery of the debt securities and the fiscal agency agreement and any warrants and warrant agreement by us will be governed by the laws of the Republic.

Jurisdiction and Consent to Service

We are owned by a foreign sovereign government and all of our directors and executive officers and some of the experts named in this prospectus are residents of Korea. In addition, all or most of our assets and the assets

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of the people named in the preceding sentence are located outside of the United States. For that reason, you may have difficultly serving process on us or the individuals described above in the United States or enforcing in a U.S. court a U.S.-court judgment based on the U.S. federal securities laws. Our Korean counsel has informed us that there would be certain conditions to be met under Korean law regarding the enforceability in Korea, either in original actions or in actions for the enforcement of U.S.-court judgments, of civil liabilities based on the U.S. federal securities laws.

We have appointed the General Manager of our New York Branch, Mr. Nak Joo Seong, and the Senior Deputy General Manager of our New York Branch, Mr. Jin Hwan Sah, and each of their successors in the future, as our authorized agents to receive service of process in any suit which a holder of any series of debt securities or warrants may bring in any state or federal court in New York City and we have accepted the jurisdiction of those courts for those actions. Our New York Branch is located at 320 Park Avenue, 32nd Floor, New York, New York 10022. These appointments are irrevocable as long as any amounts of principal, premium or interest remain payable by us to the Fiscal Agent under any series of debt securities or any warrants have not expired or otherwise terminated under their terms. If for any reason either of these two men ceases to act as our authorized agent or ceases to have an address in Manhattan, we shall appoint a replacement. The appointment of agents for receipt of service of process and the acceptance of jurisdiction of state or federal courts in New York City do not, however, apply to actions brought under the United States federal securities laws. We may also be sued in courts having jurisdiction over us located in the Republic.

We will irrevocably consent to any relief and process in connection with a suit against us in relation to the debt securities or warrants, including the enforcement or execution of any order or judgment of the court. To the extent permitted by law, we will waive irrevocably any immunity from jurisdiction to which we might otherwise be entitled in any suit based on any series of debt securities or warrants.

Foreign Exchange Controls

Before we may issue debt securities outside the Republic, the Minister of Strategy and Finance of Korea must receive a report with respect to the issuance by us of debt securities in accordance with the Foreign Exchange Transaction Act and Regulation of Korea. After issuance of debt securities outside the Republic, we are required to notify the Minister of Strategy and Finance of such issuance. No further approval or authorization is required for us to pay principal of or interest on the debt securities.

Description of Guarantees to be Issued by Us

The description below summarizes some of the provisions of the guarantees that we may issue from time to time. Copies of the forms of guarantees are or will be filed as exhibits to the registration statement of which this prospectus is a part. Since it is only a summary, the description may not contain all of the information that is important to you as a potential beneficiary of a guarantee.

The description of a guarantee that will be contained in the prospectus supplement will supplement this description and, to the extent inconsistent with this description, replace it.

General Terms of the Guarantees

Each guarantee will be issued by us as guarantor. The prospectus supplement relating to a guarantee will specify:

• the relevant obligor and the obligations guaranteed under the guarantee;

• the nature and scope of the guarantee, including whether or not it is irrevocable and unconditional;

• the status of the guarantee in relation to our other obligations;

• the governing law of the guarantee; and

• other relevant provisions of the guarantee.

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Description of Guarantees to be Issued by The Republic of Korea

The description below summarizes some of the provisions of the guarantees that the Republic may issue from time to time to guarantee our debt securities. Since it is only a summary, the description may not contain all of the information that is important to you as a potential beneficiary of a guarantee.

The prospectus supplement relating to a guarantee to be issued by the Republic will specify other specific provisions. The description of a guarantee to be issued by the Republic that will be contained in the prospectus supplement will supplement this description and, to the extent inconsistent with this description, replace it.

General Terms of the Guarantees

Each guarantee will be issued by the Republic as guarantor. The prospectus supplement relating to a guarantee will specify:

• the relevant obligor and the obligations guaranteed under the guarantee;

• the nature and scope of the guarantee, including whether or not it is irrevocable and unconditional;

• the status of the guarantee in relation to the Republic’s other obligations;

• the governing law of the guarantee; and

• other relevant provisions of the guarantee.

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LIMITATIONS ON ISSUANCE OF BEARER DEBT SECURITIES AND BEARER WARRANTS

Bearer securities will not be offered, sold or delivered in the United States or its possessions or to a United States person; except in certain circumstances permitted by United States tax regulations. Bearer securities will initially be represented by temporary global securities, without interest coupons, deposited with a common depositary in London for Euroclear and Clearstream for credit to designated accounts. Unless otherwise indicated in the prospectus supplement:

• each temporary global security will be exchangeable for definitive bearer securities on or after the date that is 40 days after issuance only upon receipt of certification of non-United States beneficial ownership of the temporary global security as provided for in United States tax regulations, provided that no bearer security will be mailed or otherwise delivered to any location in the United States in connection with the exchange; and

• any interest payable on any portion of a temporary global security with respect to any interest payment date occurring prior to the issuance of definitive bearer securities will be paid only upon receipt of certification of non-United States beneficial ownership of the temporary global security as provided for in United States tax regulations.

Bearer securities, other than temporary global debt securities, and any related coupons will bear the following legend: “Any United States person who holds this obligation will be subject to limitations under the United States federal income tax laws, including the limitations provided in Section 165(j) and 1287(a) of the Internal Revenue Code.” The sections referred to in the legend provide that, with certain exceptions, a United States person who holds a bearer security or coupon will not be allowed to deduct any loss realized on the disposition of the bearer security, and any gain, which might otherwise be characterized as capital gain, recognized on the disposition will be treated as ordinary income.

For purposes of this section, “United States person” means:

• a citizen or resident of the United States;

• a corporation, partnership or other entity created or organized in or under the laws of the United States or any political subdivision thereof; or

• an estate or trust the income of which is subject to United States federal income taxation regardless of its source.

For purposes of this section, “United States” means the United States of America, including each state and the District of Columbia, its territories, possessions and other areas subject to its jurisdiction.

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TAXATION

The following discussion summarizes certain Korean tax and U.S. federal income tax considerations that may be relevant to you if you invest in debt securities. This summary is based on laws, regulations, rulings and decisions in effect as of the date of this Prospectus. These laws, regulations, rulings and/or decisions may change; any such change could apply retroactively and could affect the continued validity of this summary.

This summary does not describe all of the tax considerations that may be relevant to you or your situation, particularly if you are subject to special tax rules. You should consult your tax adviser about the tax consequences of holding the debt securities, including the relevance to your particular situation of the considerations discussed below, as well as of state, local or other tax laws.

Korean Taxation

The following summary of Korean tax considerations applies to you so long as you are not:

• a resident of Korea;

• a corporation with registered head office or main office located in Korea;

• a corporation of which the place of effective management is located in Korea; or

• engaged in a trade or business in Korea through a permanent establishment or a fixed base to which the relevant income is attributable or with which the relevant income is effectively connected.

Tax on Interest Payments

Under current Korean tax laws, when we make payments of interest to you (excluding payments to your permanent establishment in Korea) on the debt securities denominated in a foreign currency, no amount will be withheld from such payments for, or on account of, taxes of any kind imposed, levied, withheld or assessed by Korea or any political subdivision or taxing authority thereof or therein, provided that the offering of the debt securities is deemed to be an overseas issuance under Korean tax law.

Tax on Capital Gains

You will not be subject to any Korean income or withholding taxes in connection with the sale, exchange or other disposition of the debt securities, if (i) such sale, exchange or disposition is made to other non-residents or non-Korean corporations (other than their permanent establishments in Korea) or (ii) such sale, exchange or disposition takes place outside Korea, provided that the issuance of the debt securities is deemed to be an overseas issuance under Korean tax law. If you sell, exchange or otherwise dispose of the debt securities to a Korean resident or a Korean corporation (or the Korean permanent establishment of a non-resident or a non-Korean corporation) and such sale, exchange or disposition is made within Korea, any gain realized on the transaction will be taxable at ordinary Korean withholding tax rates (the lower of (subject to the production of satisfactory evidence of the acquisition costs and certain direct transaction costs) 22% of net gain or 11% of the gross sale proceeds with respect to such transaction), unless an exemption is available under an applicable income tax treaty. For example, if you are a resident of the United States for the purposes of the income tax treaty currently in force between Korea and the United States, you are generally entitled to an exemption from Korean taxation in respect of any gain realized on a disposition of the debt securities, regardless of whether the disposition is to a Korean resident. For more information regarding tax treaties, please refer to the heading “—Tax Treaties” below.

Inheritance Tax and Gift Tax

If you die while you are the holder of the debt security, the subsequent transfer of the debt security by way of succession will be subject to Korean inheritance tax. Similarly, if you transfer the debt security as a gift, the donee will be subject to Korean gift tax and you may be required to pay the gift tax if the donee fails to do so or the donee is a non-resident.

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Stamp Duty

You will not be subject to any Korean securities transaction tax, stamp duty, registration tax or similar documentary tax in respect of or in connection with a transfer of any debt securities or in connection with the exercise of exchange rights or conversion rights that may be acquired with the debt securities.

Guarantees

Although there are no Korean tax laws, regulations, rulings or decisions specific to the payment under the guarantee herein, we believe any payments of interest on and principal amount of the debt securities (or the issue price if the debt securities were originally issued at a discount) by the Republic under the Republic’s guarantee on the debt securities denominated in a foreign currency (provided that the offering of the debt securities is deemed to be an overseas issuance under Korean tax law) and issued by us or any payments of interest on and principal amount of the debt securities (or the issue price if the debt securities were originally issued at a discount) by us under our guarantee on the debt securities denominated in a foreign currency (provided that the offering of the debt securities is deemed to be an overseas issuance under Korean tax law) and issued by a third-party Korean issuer are not subject to withholding tax. Further details of the tax consequences of the holders of our debt securities guaranteed by the Republic or third-party debt securities guaranteed by us may be provided in the relevant prospectus supplement.

Tax Treaties

At the date of this prospectus, Korea has tax treaties with, among others, Australia, Austria, Bangladesh, Belgium, Brazil, Bulgaria, Canada, China, Czech Republic, Denmark, Egypt, Finland, France, Germany, Hungary, India, Indonesia, Ireland, Italy, Japan, Luxembourg, Malaysia, Mexico, Mongolia, the Netherlands, New Zealand, Norway, Pakistan, Philippines, Poland, Republic of Fiji, Romania, Singapore, Spain, Sri Lanka, Sweden, Switzerland, Thailand, Tunisia, Turkey, the United Kingdom, the United States of America and Vietnam under which the rate of withholding tax on interest and dividends is reduced, generally to between 5% and 15%, and the tax on capital gains is often eliminated.

With respect to any gains subject to Korean withholding tax, as described under “—Tax on Capital Gains” above, you should inquire for yourself whether you are entitled to the benefit of a tax treaty with Korea. It will be your responsibility to claim the benefits of any tax treaty that may exist between your country and Korea in respect of capital gains, and to provide to the purchaser of the debt securities, or the relevant securities company handling the debt securities, as applicable, a certificate as to your country of tax residence. In the absence of sufficient proof, the purchaser, or the relevant securities company, as the case may be, must withhold tax at the normal rates.

Furthermore, in order to claim the benefit of a tax rate reduction or tax exemption available under the applicable tax treaties, you should submit to the payer of such Korean source income an application (for reduced withholding tax rate, “application for entitlement to reduced tax rate” and in the case of exemption from withholding tax, “application for exemption” under a tax treaty along with a certificate of the non-resident holder’s tax residence issued by a competent authority of the non-resident holder’s residence country) as the beneficial owner (“BO Application”). Such application should be submitted to the withholding agent prior to the payment date of the relevant income. Subject to certain exceptions, where the relevant income is paid to an overseas investment vehicle (which is not the beneficial owner of such income) (“OIV”), a beneficial owner claiming the benefit of an applicable tax treaty with respect to such income must submit its BO Application to such OIV, which must submit an OIV report and a schedule of beneficial owners to the withholding agent prior to the payment date of such income. In the case of a tax exemption application, the withholding agent is required to submit such application (together with the applicable OIV report in the case of income paid to an OIV) to the relevant district tax office by the ninth day of the month following the date of the payment of such income.

At present, Korea has not entered into tax treaties regarding inheritance or gift tax.

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Warrants

A description of the tax consequences of an investment in warrants will be provided in the applicable prospectus supplement.

United States Tax Considerations

The following discussion summarizes certain U.S. federal income tax considerations that may be relevant to you if you invest in debt securities and are a U.S. holder, and, to a limited extent, if you are a non-U.S. holder. You will be a U.S. holder if you are an individual who is a citizen or resident of the United States, a U.S. domestic corporation, or any other person that is subject to U.S. federal income tax on a net income basis in respect of its investment in a debt security. This summary deals only with U.S. holders that hold debt securities as capital assets for tax purposes. This summary does not apply to you if you are an investor that is subject to special tax rules, such as:

• a bank or thrift;

• a real estate investment trust;

• a regulated investment company;

• an insurance company;

• a dealer in securities or currencies;

• a trader in securities or commodities that elects mark-to-market treatment;

• a person that will hold debt securities as a hedge against currency risk or as a position in a straddle or conversion transaction for tax purposes;

• an entity taxed as a partnership and partners therein;

• a tax exempt organization; or

• a person whose functional currency for tax purposes is not the U.S. dollar.

A non-U.S. holder is a beneficial owner of a debt security that is not a U.S. holder.

This summary is based on the Internal Revenue Code of 1986, as amended (the “Code”), its legislative history, existing and proposed regulations promulgated thereunder, and published rulings and court decisions, all as currently in effect. These laws are subject to change, possibly on a retroactive basis.

This summary deals only with debt securities that are properly treated as indebtedness for U.S. federal income tax purposes. Any special U.S. federal income tax considerations relevant to a particular issuance of debt securities will be discussed in the applicable prospectus supplement. You should consult your tax adviser about the tax consequences of holding debt securities, including the relevance to your particular situation of the considerations discussed below, as well as of state, local or other tax laws.

Payments or Accruals of Interest

Payments or accruals of “qualified stated interest” (as defined below) on a debt security will be taxable to you as ordinary interest income at the time that you receive or accrue such amounts, in accordance with your regular method of tax accounting. If you use the cash method of tax accounting and you receive payments of interest pursuant to the terms of a debt security in a currency other than U.S. dollars, a “foreign currency”, the amount of interest income you will realize will be the U.S. dollar value of the foreign currency payment based on the exchange rate in effect on the date you receive the payment regardless of whether you convert the payment into U.S. dollars. If you are an accrual-basis U.S. holder, the amount of interest income you will realize will be

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based on the average exchange rate in effect during the interest accrual period or, with respect to an interest accrual period that spans two taxable years, at the average exchange rate for the partial period within the taxable year. Alternatively, as an accrual-basis U.S. holder you may elect to translate all interest income on foreign currency-denominated debt securities at the spot rate on the last day of the accrual period (or the last day of the taxable year, in the case of an accrual period that spans more than one taxable year), or on the date that you receive the interest payment if that date is within five business days of the end of the accrual period. If you make this election you must apply it consistently to all debt instruments from year to year and you cannot change the election without the consent of the Internal Revenue Service. If you use the accrual method of accounting for tax purposes you will recognize foreign currency gain or loss on the receipt of a foreign currency interest payment if the exchange rate in effect on the date the payment is received differs from the rate applicable to a previous accrual of that interest income. This foreign currency gain or loss will be treated as ordinary income or loss, but generally will not be treated as an adjustment to interest income received on the debt security.

Purchase, Sale and Retirement of Notes

Initially, your tax basis in a debt security generally will equal the cost of the debt security to you. Your basis will increase by any amounts that you are required to include in income under the rules governing original issue discount and market discount, and will decrease by the amount of any amortized premium and any payments other than qualified stated interest made on the debt security. The rules for determining these amounts are discussed below. If you purchase a debt security that is denominated in a foreign currency, the cost to you, and therefore generally your initial tax basis, will be the U.S. dollar value of the foreign currency purchase price on the date of purchase calculated at the exchange rate in effect on that date. If the foreign currency-denominated debt security is traded on an established securities market and you are a cash-basis taxpayer, or if you are an accrual-basis taxpayer that makes a special election, then you will determine the U.S. dollar value of the cost of the debt security by translating the amount of the foreign currency that you paid for the debt security at the spot rate of exchange on the settlement date of your purchase. The amount of any subsequent adjustments to your tax basis in a foreign currency-denominated debt security in respect of original issue discount, market discount and premium will be determined in the manner described below. If you convert U.S. dollars into a foreign currency and then immediately use that foreign currency to purchase a debt security, you generally will not have any taxable gain or loss as a result of the purchase.

When you sell or exchange a debt security, or if a debt security is retired, you generally will recognize gain or loss equal to the difference between the amount you realize on the transaction, less any accrued qualified stated interest, which will be subject to tax in the manner described above, and your tax basis in the debt security. If you sell or exchange a debt security for a foreign currency, or receive foreign currency on the retirement of a debt security, the amount you will realize for U.S. tax purposes generally will be the dollar value of the foreign currency that you receive calculated at the exchange rate in effect on the date the foreign currency debt security is disposed of or retired. If you dispose of a foreign currency debt security that is traded on an established securities market and you are a cash-basis U.S. holder, or if you are an accrual-basis holder that makes a special election, then you will determine the U.S. dollar value of the amount realized by translating the amount at the spot rate of exchange on the settlement date of the sale, exchange or retirement.

The special election available to you if you are an accrual-basis taxpayer in respect of the purchase and sale of foreign currency debt securities traded on an established securities market, which is discussed in the two preceding paragraphs, must be applied consistently to all debt instruments from year to year and cannot be changed without the consent of the Internal Revenue Service.

Except as discussed below with respect to market discount, short-term debt securities and foreign currency gain or loss, the gain or loss that you recognize on the sale, exchange or retirement of a debt security generally will be long-term capital gain or loss if you have held the debt security for more than one year. The Code provides preferential treatment under certain circumstances for net long-term capital gains recognized by individual investors. The ability of U.S. holders to offset capital losses against ordinary income is limited.

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The gain or loss that you recognize on the sale, exchange or retirement of a foreign currency debt security generally will be treated as ordinary income or loss to the extent that the gain or loss is attributable to changes in exchange rates during the period in which you held the debt security. This foreign currency gain or loss will not be treated as an adjustment to interest income that you receive on the debt security.

Original Issue Discount

If we issue debt securities at a discount from their stated redemption price at maturity, and the discount is equal to or more than the product of one-fourth of one percent (0.25%) of the stated redemption price at maturity of the debt securities multiplied by the number of whole years to their maturity, the debt securities will be “Original Issue Discount Debt Securities.” The difference between the issue price and their stated redemption price at maturity will be the “original issue discount.” The “issue price” of the debt securities will be the first price at which a substantial amount of the debt securities are sold to the public (i.e., excluding sales of debt securities to underwriters, placement agents, wholesalers, or similar persons). The “stated redemption price at maturity” will include all payments under the debt securities other than payments of qualified stated interest. The term “qualified stated interest” generally means stated interest that is unconditionally payable in cash or property, other than debt instruments issued by the Company, at least annually during the entire term of a debt security at a single fixed interest rate or, subject to certain conditions, based on one or more interest indices.

If you invest in Original Issue Discount Debt Securities you generally will be subject to the special tax accounting rules for original issue discount obligations provided by the Internal Revenue Code and certain Treasury regulations (the “OID regulations”). You should be aware that, as described in greater detail below, if you invest in an Original Issue Discount Debt Security you generally will be required to include original issue discount in ordinary gross income for U.S. federal income tax purposes as it accrues, before you receive the cash attributable to that income.

In general, and regardless of whether you use the cash or the accrual method of tax accounting, if you are the holder of an Original Issue Discount Debt Security with a maturity greater than one year, you will be required to include in ordinary gross income the sum of the “daily portions” of original issue discount on that debt security for all days during the taxable year that you own the debt security. The daily portions of original issue discount on an Original Issue Discount Debt Security are determined by allocating to each day in any accrual period a ratable portion of the original issue discount allocable to that period. Accrual periods may be any length and may vary in length over the term of an Original Issue Discount Debt Security, so long as no accrual period is longer than one year and each scheduled payment of principal or interest occurs on the first or last day of an accrual period. If you are the initial holder of the debt security, the amount of original issue discount on an Original Issue Discount Debt Security allocable to each accrual period is determined by:

(i) multiplying the “adjusted issue price” (as defined below) of the debt security at the beginning of the accrual period by a fraction, the numerator of which is the annual yield to maturity of the debt security and the denominator of which is the number of accrual periods in a year; and

(ii) subtracting from that product the amount, if any, payable as qualified stated interest allocable to that accrual period.

In the case of an Original Issue Discount Debt Security that is a floating rate debt security, both the “annual yield to maturity” and the qualified stated interest will be determined for these purposes as though the debt security had borne interest in all periods at a fixed rate generally equal to the rate that would be applicable to interest payments on the debt security on its date of issue or, in the case of some floating rate debt securities, the rate that reflects the yield that is reasonably expected for the debt security. Additional rules may apply if interest on a floating rate debt security is based on more than one interest index. The “adjusted issue price” of an Original Issue Discount Debt Security at the beginning of any accrual period will generally be the sum of its issue price, including any accrued interest, and the amount of original issue discount allocable to all prior accrual periods,

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reduced by the amount of all payments other than any qualified stated interest payments on the debt security in all prior accrual periods. All payments on an Original Issue Discount Debt Security, other than qualified stated interest, will generally be viewed first as payments of previously accrued original issue discount, to the extent of the previously accrued discount, with payments considered made from the earliest accrual periods first, and then as a payment of principal. The “annual yield to maturity” of a debt security is the discount rate, appropriately adjusted to reflect the length of accrual periods, that causes the present value on the issue date of all payments on the debt security to equal the issue price. As a result of this “constant yield” method of including original issue discount income, the amounts you will be required to include in your gross income if you invest in an Original Issue Discount Debt Security denominated in U.S. dollars will generally be less in the early years and greater in the later years than amounts that would be includible on a straight-line basis.

You generally may make an irrevocable election to include in income your entire return on a debt security (i.e., the excess of all remaining payments to be received on the debt security, including payments of qualified stated interest, over the amount you paid for the debt security) under the constant yield method described above. For debt securities purchased at a premium or bearing market discount in your hands, if you make this election you will also be deemed to have made the election (discussed below under “Premium and Market Discount”) to amortize premium or to accrue market discount in income currently on a constant yield basis.

In the case of an Original Issue Discount Debt Security that is also a foreign currency-denominated debt security, you should determine the U.S. dollar amount includible as original issue discount for each accrual period by (i) calculating the amount of original issue discount allocable to each accrual period in the foreign currency using the constant yield method, and (ii) translating the foreign currency amount so determined at the average exchange rate in effect during that accrual period (or, with respect to an interest accrual period that spans two taxable years, at the average exchange rate for each partial period). Alternatively, you may translate the foreign currency amount so determined at the spot rate of exchange on the last day of the accrual period (or the last day of the taxable year, for an accrual period that spans two taxable years), or at the spot rate of exchange on the date of receipt, if that date is within five business days of the last day of the accrual period, provided that you have made the election described under “—Payments or Accruals of Interest” above. Because exchange rates may fluctuate, if you are the holder of an Original Issue Discount Debt Security that is also a foreign currency debt security you may recognize a different amount of original issue discount income in each accrual period than would be the case if you were the holder of an otherwise similar Original Issue Discount Debt Security denominated in U.S. dollars. Upon the receipt of an amount attributable to original issue discount, whether in connection with a payment of an amount that is not qualified stated interest or the sale or retirement of the Original Issue Discount Debt Security, you will recognize ordinary income or loss measured by the difference between the amount received, translated into U.S. dollars at the exchange rate in effect on the date of receipt or on the date of disposition of the Original Issue Discount Debt Security, as the case may be, and the amount accrued, using the exchange rate applicable to such previous accrual.

If you purchase an Original Issue Discount Debt Security outside of the initial offering at a cost less than its “remaining redemption amount”, or if you purchase an Original Issue Discount Debt Security in the initial offering at a price other than the debt security’s issue price, you will also generally be required to include in gross income the daily portions of original issue discount, calculated as described above. However, if you acquire an Original Issue Discount Debt Security at a price greater than its adjusted issue price, you will be entitled to reduce your periodic inclusions of original issue discount to reflect the premium paid over the adjusted issue price. The remaining redemption amount for an Original Issue Discount Debt Security is the total of all future payments to be made on the debt security other than qualified stated interest.

Floating rate debt securities generally will be treated as “variable rate debt instruments” under the OID regulations. Accordingly, the stated interest on a floating rate debt security generally will be treated as qualified stated interest, and such a debt security will not have original issue discount solely as a result of the fact that it provides for interest at a variable rate. A floating rate debt security that does not qualify as a variable rate debt instrument will be subject to special rules (the “contingent payment regulations”) that govern the tax treatment of

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debt obligations that provide for contingent payments (“contingent debt obligations”). A detailed description of the tax considerations relevant to U.S. holders of any such debt securities will be provided in the applicable prospectus supplement.

Certain debt securities may be redeemed prior to maturity, either at our option or at the option of the holder, or may have special repayment or interest rate reset features as indicated in the prospectus supplement. Original Issue Discount Debt Securities containing these features may be subject to rules that differ from the general rules discussed above. If you purchase Original Issue Discount Debt Securities with these features, you should carefully examine the prospectus supplement and consult your tax adviser about their treatment since the tax consequences with respect to original issue discount will depend, in part, on the particular terms and features of the debt securities.

Short-Term Debt Securities

The rules described above will also generally apply to Original Issue Discount Debt Securities with maturities of one year or less (“short-term debt securities”), but with some modifications.

First, the original issue discount rules treat none of the interest on a short-term debt security as qualified stated interest, but treat a short-term debt security as having original issue discount. Thus, all short-term debt securities will be Original Issue Discount Debt Securities. Except as noted below, if you are a cash-basis holder of a short-term debt security and you do not identify the short-term debt security as part of a hedging transaction you will generally not be required to accrue original issue discount currently, but you will be required to treat any gain realized on a sale, exchange or retirement of the debt security as ordinary income to the extent such gain does not exceed the original issue discount accrued with respect to the debt security during the period you held the debt security. You may not be allowed to deduct all of the interest paid or accrued on any indebtedness incurred or maintained to purchase or carry a short-term debt security until the maturity of the debt security or its earlier disposition in a taxable transaction. Notwithstanding the foregoing, if you are a cash-basis U.S. holder of a short-term debt security you may elect to accrue original issue discount on a current basis, in which case the limitation on the deductibility of interest described above will not apply. A U.S. holder using the accrual method of tax accounting and some cash method holders, including banks, securities dealers, regulated investment companies and certain trust funds, generally will be required to include original issue discount on a short-term debt security in gross income on a current basis. Original issue discount will be treated as accruing for these purposes on a ratable basis or, at the election of the holder, on a constant yield basis based on daily compounding.

Second, regardless of whether you are a cash- or accrual-basis holder, if you are the holder of a short-term debt security you can elect to accrue any “acquisition discount” with respect to the debt security on a current basis. Acquisition discount is the excess of the remaining redemption amount of the debt security at the time of acquisition over the purchase price. Acquisition discount will be treated as accruing ratably or, at the election of the holder, under a constant yield method based on daily compounding. If you elect to accrue acquisition discount, the original issue discount rules will not apply.

Finally, the market discount rules described below will not apply to short-term debt securities.

As described above, certain of the debt securities may be subject to special redemption features. These features may affect the determination of whether a debt security has a maturity of one year or less and thus is a short-term debt security. If you purchase debt securities with these features, you should carefully examine the prospectus supplement and consult your tax adviser about these features.

Premium and Market Discount

If you purchase a debt security at a cost greater than the debt security’s remaining redemption amount, you will be considered to have purchased the debt security at a premium, and you may elect to amortize the premium

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as an offset to interest income, using a constant yield method, over the remaining term of the debt security. If you make this election, it generally will apply to all debt instruments that you hold at the time of the election, as well as any debt instruments that you subsequently acquire. In addition, you may not revoke the election without the consent of the Internal Revenue Service. If you elect to amortize the premium you will be required to reduce your tax basis in the debt security by the amount of the premium amortized during your holding period. Original Issue Discount Debt Securities purchased at a premium will not be subject to the original issue discount rules described above. In the case of premium on a foreign currency debt security, you should calculate the amortization of the premium in the foreign currency. Amortization deductions attributable to a period reduce interest payments in respect of that period, and therefore are translated into U.S. dollars at the rate that you use for those interest payments. Exchange gain or loss will be realized with respect to amortized premium on a foreign currency debt security based on the difference between the exchange rate computed on the date or dates the premium is amortized against interest payments on the debt security and the exchange rate on the date when the holder acquired the debt security. For a U.S. holder that does not elect to amortize premium, the amount of premium will be included in your tax basis when the debt security matures or is disposed of. Therefore, if you do not elect to amortize premium and you hold the debt security to maturity, you generally will be required to treat the premium as capital loss when the debt security matures.

If you purchase a debt security at a price that is lower than the debt security’s remaining redemption amount, or in the case of an Original Issue Discount Debt Security, the debt security’s adjusted issue price, by 0.25% or more of the remaining redemption amount, or adjusted issue price, multiplied by the number of remaining whole years to maturity, the debt security will be considered to bear “market discount” in your hands. In this case, any gain that you realize on the disposition of the debt security generally will be treated as ordinary interest income to the extent of the market discount that accrued on the debt security during your holding period. In addition, you could be required to defer the deduction of a portion of the interest paid on any indebtedness that you incurred or continued to purchase or carry the debt security. In general, market discount will be treated as accruing ratably over the term of the debt security, or, at your election, under a constant yield method. You must accrue market discount on a foreign currency debt security in the specified currency. The amount that you will be required to include in income in respect of accrued market discount will be the U.S. dollar value of the accrued amount, generally calculated at the exchange rate in effect on the date that you dispose of the debt security.

You may elect to include market discount in gross income currently as it accrues (on either a ratable or constant yield basis), in lieu of treating a portion of any gain realized on a sale of the debt security as ordinary income. If you elect to include market discount on a current basis, the interest deduction deferral rule described above will not apply. If you do make such an election, it will apply to all market discount debt instruments that you acquire on or after the first day of the first taxable year to which the election applies. The election may not be revoked without the consent of the Internal Revenue Service. Any accrued market discount on a foreign currency debt security that is currently includible in income will be translated into U.S. dollars at the average exchange rate for the accrual period (or portion thereof within the holder’s taxable year).

Indexed Notes and Other Notes Providing for Contingent Payments

The contingent payment regulations generally require accrual of interest income on a constant yield basis in respect of contingent debt obligations at a yield determined at the time of issuance of the obligation, and may require adjustments to these accruals when any contingent payments are made. In addition, special rules may apply to floating rate debt securities if the interest payable on the debt securities is based on more than one interest index. We will provide a detailed description of the tax considerations relevant to U.S. holders of any debt securities that are subject to the special rules discussed in this paragraph in the relevant prospectus supplement.

Information Reporting and Backup Withholding

The paying agent must file information returns with the United States Internal Revenue Service in connection with debt security payments made to certain United States persons. If you are a United States person,

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you generally will not be subject to United States backup withholding tax on such payments if you provide your taxpayer identification number to the paying agent. You may also be subject to information reporting and backup withholding tax requirements with respect to the proceeds from a sale of the debt securities. If you are not a United States person, in order to avoid information reporting and backup withholding tax requirements you may have to comply with certification procedures to establish that you are not a United States person.

In addition, a U.S. holder may be subject to certain reporting requirements with respect to the holding of certain foreign financial assets, including debt of foreign issuers, if the aggregate value of all of such assets exceeds US$50,000. A U.S. holder should consult its own tax advisor regarding the application of the information reporting rules to our debt securities and to its particular situation.

Foreign Account Tax Compliance Act

We or a non-U.S. financial institution through which payments are made may be required pursuant to FATCA to collect and provide to the U.S. Internal Revenue Service or another tax authority substantial information regarding investors in debt securities. As such, holders may be required to provide information and tax documentation regarding their tax identities as well as that of their direct and indirect owners. Additionally, starting at the earliest on January 1, 2017, “foreign passthru payments” (a term not yet defined) may be subject to withholding under FATCA. Withholding on such payments under FATCA will not apply to debt securities issued before the date that is six months after the publication of final regulations defining “foreign passthru payment,” unless the debt securities are materially modified on or after such date.

By purchasing the Notes, U.S. holders agree to provide an IRS form W-9, and whatever other information may be necessary for us to comply with these reporting obligations. If an amount of, or in respect of, U.S. withholding tax were to be deducted or withheld from payments on the debt securities as a result of an investor’s failure to comply with these rules, neither we nor any paying agent nor any other person would be required to pay additional amounts with respect to any debt securities as a result of the deduction or withholding of such tax. You should consult your tax advisors on how FATCA may apply to payments you receive under the debt securities.

Warrants

A description of the tax consequences of an investment in warrants will be provided in the applicable prospectus supplement.

Guarantees

A description of the tax consequences of an investment in guarantees will be provided in the applicable prospectus supplement.

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PLAN OF DISTRIBUTION

We and the Republic, if a guarantee by the Republic is furnished, may sell or issue the debt securities, warrants or guarantees in any of three ways:

• through underwriters or dealers;

• directly to one or more purchasers; or

• through agents.

The prospectus supplement relating to a particular series of debt securities, warrants or guarantees will state:

• the names of any underwriters;

• the purchase price of the securities;

• the proceeds to us from the sale;

• any underwriting discounts and other compensation;

• the initial public offering price;

• any discounts or concessions allowed or paid to dealers; and

• any securities exchanges on which the securities will be listed.

Any underwriter involved in the sale of securities will acquire the securities for its own account. The underwriters may resell the securities from time to time in one or more transactions, including negotiated transactions, at a fixed public offering price or at varying prices to be determined at the time of sale. The securities may be offered to the public either by underwriting syndicates represented by managing underwriters or by underwriters without a syndicate. Unless the prospectus supplement states otherwise, certain conditions must be satisfied before the underwriters become obligated to purchase securities from us and the Republic, if applicable, and they will be obligated to purchase all of the securities if any are purchased. The underwriters may change any initial public offering price and any discounts or concessions allowed or reallowed or paid to dealers.

If we and the Republic, if a guarantee by the Republic is furnished, sell any securities through agents, the prospectus supplement will identify the agent and indicate any commissions payable by us and the Republic, if applicable. Unless the prospectus supplement states otherwise, all agents will act on a best efforts basis and will not acquire the securities for their own account.

We and the Republic, if a guarantee by the Republic is furnished, may authorize agents, underwriters or dealers to solicit offers by certain specified entities to purchase the securities from us and the Republic, if applicable, at the public offering price set forth in a prospectus supplement pursuant to delayed delivery contracts. The prospectus supplement will set out the conditions of the delayed delivery contracts and the commission receivable by the agents, underwriters or dealers for soliciting the contracts.

We and the Republic, if a guarantee by the Republic is furnished, may offer debt securities as consideration for the purchase of other of our debt securities, either in connection with a publicly announced tender offer or in privately negotiated transactions. The offer may be in addition to or in lieu of sales of debt securities directly or through underwriters or agents. We may offer guarantees as consideration for transactions involving securities of other issuers.

Agents and underwriters may be entitled to indemnification by us against certain liabilities, including liabilities under the Securities Act of 1933, as amended, or to contribution from us with respect to certain payments which the agents or underwriters may be required to make. Agents and underwriters may be customers of, engage in transactions with, or perform services (including commercial and investment banking services) for us and the Republic in the ordinary course of business.

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LEGAL MATTERS

The validity of any particular series of debt securities or warrants issued with debt securities or any guarantees will be passed upon for us and any underwriters or agents by United States and Korean counsel identified in the related prospectus supplement.

AUTHORIZED REPRESENTATIVES IN THE UNITED STATES

Our authorized agents in the United States are Mr. Nak Joo Seong, General Manager of our New York Branch, or Mr. Jin Hwan Sah, Senior Deputy General Manager of our New York Branch. The address of our New York Branch is 320 Park Avenue, 32nd Floor, New York, New York 10022. The authorized representative of the Republic in the United States is Mr. Suk-Kwon Na, Financial Attache, Korean Consulate General in New York, located at 335 East 45th Street, New York, New York 10017.

OFFICIAL STATEMENTS AND DOCUMENTS

Our President and Chairman of the Board of Directors, in his official capacity, has supplied the information set forth under “The Korea Development Bank” (except for the information set out under “The Korea Development Bank—Business—Government Support and Supervision”). Such information is stated on his authority.

The Minister of Strategy and Finance of The Republic of Korea, in his official capacity, has supplied the information set out under “The Korea Development Bank—Business—Government Support and Supervision” and “The Republic of Korea.” Such information is stated on his authority. The documents identified in the portion of this prospectus captioned “The Republic of Korea” as the sources of financial or statistical data are official public documents of the Republic or its agencies and instrumentalities.

EXPERTS

Our separate financial statements as of and for the years ended December 31, 2013 and 2014 have been included in this prospectus in reliance upon the report of KPMG Samjong Accounting Corp., independent auditors, appearing elsewhere herein, and upon the authority of said firm as experts in accounting and auditing.

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FORWARD-LOOKING STATEMENTS

This prospectus includes future expectations, projections or “forward-looking statements”, as defined in Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The words “believe”, “expect”, “anticipate”, “estimate”, “project” and similar words identify forward-looking statements. In addition, all statements other than statements of historical facts included in this prospectus are forward-looking statements. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we can give no assurance that such expectations will prove correct. This prospectus discloses important factors that could cause actual results to differ materially from our expectations (“Cautionary Statements”). All subsequent written and oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the Cautionary Statements.

Factors that could adversely affect the future performance of the Korean economy include:

• difficulties in the financial sectors in Europe and elsewhere and increased sovereign default risks in selected countries and the resulting adverse effects on the global financial markets;

• adverse conditions and volatility in the United States and worldwide credit and financial markets and the general weakness of the global economy;

• adverse changes or volatility in foreign currency reserve levels, commodity prices (including oil prices), exchange rates (including fluctuation of the U.S. dollar or Japanese Yen exchange rates or revaluation of the Chinese Renminbi), interest rates and stock markets;

• increasing levels of household debt;

• continuing adverse conditions in the economies of countries and regions that are important export markets for Korea, such as the United States, Europe, Japan and China, or in emerging market economies in Asia or elsewhere;

• substantial decreases in the market prices of Korean real estate;

• increasing delinquencies and credit defaults by consumer and small and medium sized enterprise borrowers;

• declines in consumer confidence and a slowdown in consumer spending;

• adverse developments in the economies of countries that are important export markets for the Republic, such as the United States, Europe, Japan and China, or in emerging market economies in Asia or elsewhere;

• difficulties in the financial sector in Korea, including the savings bank sector;

• the continued emergence of the Chinese economy, to the extent its benefits (such as increased exports to China) are outweighed by its costs (such as competition in export markets or for foreign investment and the relocation of the manufacturing base from the Republic to China);

• social and labor unrest;

• a decrease in tax revenues and a substantial increase in the Government’s expenditures for fiscal stimulus measures, unemployment compensation and other economic and social programs that, together, would lead to an increased government budget deficit;

• financial problems or lack of progress in the restructuring of Korean conglomerates, other large troubled companies, their suppliers or the financial sector;

• loss of investor confidence arising from corporate accounting irregularities and corporate governance issues at certain Korean conglomerates;

• increases in social expenditures to support an aging population in Korea or decreases in economic productivity due to the declining population size in Korea;

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• the economic impact of any pending or future free trade agreements;

• geo-political uncertainty and risk of further attacks by terrorist groups around the world;

• the occurrence of severe health epidemics in Korea and other parts of the world including an outbreak of severe acute, respiratory syndrome, or SARS, swine or avian flu, or Ebola;

• deterioration in economic or diplomatic relations between the Republic and its trading partners or allies, including deterioration resulting from trade disputes or disagreements in foreign policy;

• political uncertainty or increasing strife among or within political parties in the Republic;

• hostilities or unrest involving oil producing countries in the Middle East and Northern Africa and any material disruption in the supply of oil or increase in the price of oil;

• the occurrence of severe earthquakes, tsunamis or other natural disasters in Korea and other parts of the world, particularly in trading partners (such as the March 2011 earthquake in Japan, which also resulted in the release of radioactive materials from a nuclear plant that had been damaged by the earthquake); and

• an increase in the level of tension or an outbreak of hostilities between North Korea and the Republic or the United States.

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FURTHER INFORMATION

We filed a registration statement with respect to the securities with the Securities and Exchange Commission under the Securities Act of 1933, as amended, and its related rules and regulations. You can find additional information concerning ourselves and the securities in the registration statement and any pre- or post-effective amendment, including its various exhibits, which may be inspected at the public reference facilities maintained by the Securities and Exchange Commission at 100 F Street, N.E., Washington, D.C. 20549. These filings are also available to the public from the Securities and Exchange Commission’s website at http://www.sec.gov.

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HEAD OFFICE OF THE BANK

14, Eunhaeng-ro (16-3, Youido-dong),

Youngdeungpo-gu, Seoul 150-973

The Republic of Korea

FISCAL AGENT AND PRINCIPAL PAYING AGENT

The Bank of New York Mellon

101 Barclay Street, 21^st Floor West

New York, NY 10286

United States of America

LEGAL ADVISORS TO THE BANK

as to Korean law	as to U.S. law
Hwang Mok Park P.C. 9th Floor, Shinhan Bank Building 20, Sejong-daero 9-gil Jung-gu, Seoul 100-724 The Republic of Korea	Cleary Gottlieb Steen & Hamilton LLP c/o 19th Floor, Ferrum Tower 19 Eulji-ro 5-gil, Jung-gu Seoul 100-210 The Republic of Korea

LEGAL ADVISOR TO THE UNDERWRITERS

as to U.S. law

Davis Polk & Wardwell LLP

c/o 18th Floor

The Hong Kong Club Building

3A Chater Road

Hong Kong

AUDITOR OF THE BANK

KPMG Samjung Accounting Corp.

10^th Floor, Star Tower

737 Yeoksam-dong

Gangnam-gu, Seoul 135-984

The Republic of Korea

SINGAPORE LISTING AGENT

Shook Lin & Bok LLP

1 Robinson Road

#18-00 AIA Tower

Singapore 048542