Seoul urged to open up financial market

By Kim Jae-kyoung

Korea must create a level playing field for foreign financial companies to achieve its renewed attempt to make Seoul a financial center in Asia, according to analysts.

They stressed that Korea's financial system needs a major overhaul to improve the competitiveness of its market and banks.

Korean financial firms, including banks and securities companies, still remain inwardly focused and lack scale beyond the country, while global financial firms are leaving due to the unfriendly regulatory and business environment.

Against this backdrop, the most urgent task for President Moon Jae-in is to push for deregulation and create a level playing field for every market player.

"Korea needs to open up its financial system to foreign competition. Only competition inside Korea can make Korean banks competitive abroad,"Alicia Garcia-Herrero, Asia-Pacific chief economist at Natixis, told The Korea Times.

She pointed out that it is well known in the market that Korea's banking system is extremely difficult for foreign participants.

Citing the example of Standard Chartered, she said, "In fact, no foreign bank has a relevant enough share of the market. Many large global players have been unable to tap the market."

On Oct. 11, the Financial Services Commission (FSC) unveiled its renewed roadmap for 2017 to 2019 to develop Seoul as a financial center. The government first introduced a financial hub plan in 2008 but it has made little progress.

The latest move comes as a growing number of foreign financial firms operating in Seoul have been closing their offices or reducing operations.

Over the past year, Barclays Capital decided to withdraw its investment banking division, following Citigroup (consumer finance) and Royal Bank of Scotland. Goldman Sachs closed its asset management arm, and UBS and BBVA returned their banking licenses.

Together with market deregulations, the experts said that more effort should be made to revamp the profit structure of Korean banks and other financial firms.

"Korean banks rely too heavily on interest income compared to income from fees. The opposite is true for many foreign financial institutions," said Sohn Sung-won, professor of economics and finance at California State University, Channel Islands.

He previously served as CEO of Los Angeles-based HanmiBank and executive vice president of Wells Fargo Bank.

"Fee income is more stable over economic cycles than interest income. At home, Korean banks should try to compete more aggressively with foreign banks in going after fee income," he said.

Sohn also suggested that large Korean banks acquire foreign financial firms.

He explained this has two goals — first, financial technology can be transferred to Korean banks, and second, Korean banks would have access to overseas customer bases.

"Japanese-owned banks in the U.S and in Europe have done this very well. Korean banks should do the same."

Achilles' heel for economy

The biggest concern is that "finance" has become a major stumbling block that prevents the country from becoming a globally competitive player.

In other words, finance is unable to play its role in supporting the economy in the coming Fourth Industrial Revolution.

"Banks in Korea have always been subordinated to the goals of developing the manufacturing industry," said Mauro Guillen, director of the Lauder Institute at the University of Pennsylvania's Wharton School.

"Although with ups and downs, it worked in the 1960s, 70s and 80s. Then they were privatized, and many chaebol positioned themselves in the banking sector," he added. "Korea does not have a clear advantage in this area, and Seoul is not Hong Kong, Tokyo or Shanghai."

According to the latest survey by the World Economic Forum, Korea's overall global competitiveness ranked 26th out of 137 countries surveyed. It peaked at 11th in 2007 but has since been falling, stopping at 26th for four years since 2014.

One of the biggest culprits behind the poor ranking was the underdeveloped financial environment.

Korea ranked 74th in overall financial market development. It is performing especially poorly in the areas of the soundness of banks (91st), ease of access to loans (90th) and availability of venture capital (64th).

In the Global Financial Centers Index (GFCI) released by Z/Yen Group in March, Korea saw the deepest fall, dropping to 24th, 12 notches down from six months ago. Singapore ranked third, Hong Kong fourth, and Shanghai 13th.

Bruno Lanvin, founder and co-editor of INSEAD's global indices, said that the degree of sophistication and efficiency of domestic financial markets are important components of national overall competitiveness.

"This being said, Seoul can find inspiration from other financial hubs to develop its advantages in this highly competitive area," he said.

"If one looks at successful examples such as London, it is clear that being a multi-cultural, highly connected center helps, as well as having a liberal fiscal and legal environment around financial transactions."

He pointed out that the recent European experience — post-Brexit — also shows that such advantages are not unassailable, and can be significantly eroded by political and technological changes, noting that places like Frankfurt or Paris now offer alternatives to London.

"One lesson to be drawn from Brexit is that an open economy will always be seen as a better potential financial hub than a closed or isolated economy," he said.

"Providing appropriate attention to new methods of trading and new vehicles, such as blockchains, orcrypto-currencies,should also be considered."