By Kim Jae-won
Staff Reporter

The nation’s deposit insurance system is expected to undergo a major overhaul in the coming months, as the financial regulator is taking action to crack down on firms’ unethical activities.

In a joint research report released Sunday, three finance research institutes suggested that the nation reform the system because the current scheme does not reflect rapidly-changing circumstances following the global financial crisis.

The research, conducted jointly by the Korea Institute of Finance, the Korea Capital Market Institute and Korea Insurance Research Institute, was commissioned by the Financial Services Commission (FSC).

The report also said that Korean financial firms should grow bigger through takeovers and overseas expansion if they are to enhance their global competitiveness amid greater discussion worldwide over stricter regulations on bank growth.

The joint report said that local financial firms should increase their size and expand the scope of their business, but to the extent that they don't create systemic risks.
"Given the gap existing between local financial firms and global players, it is inevitable that Korean financial companies will continue to become larger," the report said.

"Within five years, South Korea should aim to nurture regional players in Asia by securing more than one spot in Asia's top 10 banks. By 2020, over two or three leading players need to come out."

The report said that the FSC was drawn up over the last seven months in a bid to provide policy suggestions for the long-term development of the local financial industry.

The report follows U.S. President Barack Obama's recent proposal of what is now known as the "Volcker rule" ― to curtail bank risk-taking and limit their growth and trading activities.

Excessive risk-taking and loose regulations on financial firms were blamed for the global financial rout, sparked by the collapse of Lehman Brothers in 2008.

But the report said it is difficult to apply Obama's suggestion to financial firms in emerging countries, and Korea should to maintain its deregulation stance in order to raise the competitiveness of the local financial sector.

The view is in line with recent remarks by Chin Dong-soo, chairman of the FSC. He said the rule would be ill-suited if applied to Korea as local financial firms need more growth.

The Korean banking sector is set to face a wave of takeover moves as the government is seeking to privatize Woori Financial Group and the state-run Korea Development Bank (KDB).

The government plans to decide how to sell its controlling 50 percent plus one share in Woori Finance in the first half, following a planned block sale of its minority stake. It also plans to reduce its 100 percent stake in KDB Financial Group within four years to put it in private hands.

"We suggest that the government should push for the sale of Woori Finance first, and that the privatization of KDB be sought after improving its finance and profit structures," the report said.

Meanwhile, the report said that although the chance that South Korea's household debt will begin to sour is low, monitoring should be strengthened to stem excessive debt growth.

"(The authorities should) maintain stricter rules on home-backed lending ... If necessary, there is the need to consider imposing a cap on the size of home loans over the mid- and long-term," it added.

In July and September, the financial watchdog toughened regulations on mortgage loans due to concerns that a surge in home-backed loans could result in ballooning housing prices.

shosta@koreatimes.co.kr