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By Yoon Ja-young
Staff Reporter
President-elect Lee Myung-bak has emphasized that he would be a business friendly president, boosting investment through deregulation. Among his key pledges for conglomerates is the easing of bank ownership rules.
Currently, non-financial companies with over 2 trillion won in assets are banned from owning a 4 percent stake or over in a commercial bank. Introduced in 1984, it aims at preventing chaebol from using banks as their private coffers. The regulation is strict for banks as they are involved in savings and lending. Consequently, most big banks have shares owned by the government, individual investors or foreign funds.
With a number of other regulations limiting business capital from entering financial industry, the barrier has increased the stability of the economy, blocking the collapse of an industry from spreading to banks.
The call for the strengthening of this came after the Asian financial crisis, on the notion that conglomerates had used their financial subsidiaries as their private banks and their exorbitant expansion strategy on loans drove both the financial and non-financial sectors to collapse.
Calls for Scrapping the Barrier
However, some others have constantly demanded that the regulation be eased. According to a survey on 184 financial experts by the Federation of Korean Industries, a chaebol mouthpiece, 67.3 percent said the barrier should be either abolished or eased. Some 42.9 percent said it didn't contribute to the effectiveness of the financial market or the stability of the financial system, while 40.2 percent said it did.
They note that foreigners hold around a 70-percent stake in major local banks. Foreign funds have reaped enormous money by buying local banks after the Asian financial crisis. The U.S. Lone Star fund is estimated to make over 5 trillion won when it sells its stake in Korea Exchange Bank, and Newbridge Capital, a U.S. private equity fund, made 1.2 trillion won when it sold shares of Korea First Bank to the London-based Standard Chartered in 2005.
They say state-owned banks are likely to be bought by foreign investors as well when they get privatized, as the cash rich conglomerates are banned from owning banks. It will result in foreign funds reigning over the local financial industry.
Those calling for abolishing the barrier also say that it would help local banks grow into global players.
Stuck between developed countries equipped with better technologies and new emerging giants like China with cheap labor, the manufacturing sector is seeing profit margins fall.
The government has said that services sector, especially finance, should be a new growth engine. The financial sector, however, is lagging far behind, compared with the outstanding manufacturing.
According to The Banker, which measured the Trans Nationality Index (TNI) of 60 major global banks, Korea stood at 4.3, far lower than European banks with 46.1 or the U.S. banks at 22.6, and even lower than the Asian average of 16. This means the Korean financial industry has a long way to go to become global.
Those opposing the bank ownership rule argue that the competitive manufacturing sector, which has abundant capital, human resources, and global network, should be induced to invest in the financial industry. Easing of the rule would open the doors for capital to enter the financial sector and help it grow.
They also point out that the soundness of the industry has improved since the Asian financial crisis. The corporate governance structure has become more transparent and reckless lending is less likely.
``The (manufacturing) industry with global competitiveness has no reason to use a financial subsidiary as a private coffer since it can raise money more cheaply on the direct financing market, instead of local banks'' said Cho Dong-keun, a Myongji University professor, in a report published by the Center for Free Enterprise.
He said the regulation is a barrier that allows only half of the arena to be used, resulting in handing over most of the local banks to foreign capital. He called for the policy paradigm shift, from the segregation of business and financial capital to the fusion of the two.
As easing of the bank ownership regulation was one of Lee's main pledges, the transition team has said it will push for demolishing the barrier between banks and businesses step by step. It is likely to allow pension funds and consortiums of small and medium sized firms to own banks first.
Problems Linger on
The debate, however, isn't over. Opposition is still fierce regarding the plan.
The Solidarity for Economic Reform, a leading NGO, agreed with the President-elect when he pointed out the weakness in the financial industry. Lee has said he would induce development of the sector and job creation through deregulation.
The NGO, however, showed concern. ``The financial sector is the basic infrastructure of the market economy, which should not be accessed from outdated development policy perspectives such as the ones used to be applied to `infant industries' or `key industries' during the era of economic development,'' it said.
It said financial institutions' soundness and the transparency of financial transactions that thoroughly protect consumers' rights should come first for the development of the industry. According to the NGO, only four among the world's 100 largest banks have industrial capital as governing shareholder. Among OECD member countries, 48 percent regulate businesses from owning banks, ``The President-elect should keep in mind that it was not excessive regulation but government intervention not based on law that hindered financial industry development.''
There have been a number of cases that involved conglomerates running financial companies, in which the financial subsidiary was abused to boost the main business of the group. Hyundai Securities, for example, was once used to manipulate stock prices of Hyundai Electronics, which later went bankrupt. Financially weak businesses may use their financial companies to raise money to expand business anytime.
The NGO showed concern over the cap-easing plan as it doubted there could be perfect supervision on such reckless behavior. ``Financial supervision is still lax here compared with other developed countries, and the regulatory body has many problems in its capability to execute the law.'' It said arbitrary execution of law is the most serious problem.
The transition team is causing confusion with arbitrariness. Kwak Seung-jun, one of Lee's key advisors on economic policies at the transition team, said the top four conglomerates, namely Samsung, LG, SK, and Hyundai-Kia Automotive Group wouldn't be allowed to acquire banks even with the easing of the regulation.
chizpizza@koreatimes.co.kr
