Hot-Button Financial Issues Await New Government
By Na Jeong-ju
Staff Reporter
Debates are expected to heat up on whether the country should ease rule on conglomerates' ownership of banks in the wake of the presidential election with political parties and government agencies keenly divided on the issue.
The government's plan to privatize Woori Financial Group and the Industrial Bank of Korea and HSBC's bid to take over Korea Exchange Bank are also some of the hot-button financial topics.
Companies will take steps to sharpen their edges and overhaul their organizations and product lineups as the Capital Market Consolidation Act, scheduled to take effect in early 2009, will remove barriers between banks and non-banking institutions.
Rising credit risks and financial market volatility caused by the U.S. subprime meltdown will haunt the next government. Economists say the country has become more vulnerable to a credit crunch due to rising interest rates and heavy household and corporate debts.
Also drawing attention is whether the government will stick to tough anti-speculation measures, which have been effective in cooling down property prices, but have hit the construction industry hard.
Conglomerates' Ownership of Banks
The idea of easing regulations to enable chaebol, or Korea's family owned conglomerates like Samsung, LG and Hyundai, to own banks is likely to become a hot potato.
Conglomerates say removing regulations limiting chaebol's involvement with banks is necessary to halt growing foreign ownership of banks, while banks say that this will hamper the growth of the financial industry.
Under the current banking law, companies categorized as ``non-financial'' players are banned from owning more than 10 percent of stakes in banks and other types of financial firms. Even if they do, they are only allowed to exercise voting rights of up to 4 percent.
President elect Lee Myung-bak of the Grand National Party has made it clear that the regulations banning conglomerates from owning banks should be removed.
However, the scandal surrounding Samsung Group's alleged creation of slush funds through a Woori Bank branch will negatively affect conglomerates' moves to take over banks.
Analysts say the allegation that the country's largest conglomerate raised tens of billions of won in slush funds to bribe politicians and prosecutors will make it more difficult for the government to ease rules restricting non-financial companies' investment in banks.
Prosecutors say Woori Bank violated laws to help Samsung, its largest corporate client, stash slush funds at hundreds of secret accounts, an indication that Samsung used Woori as its private coffer.
``Samsung is not the owner of Woori, but it acted like an owner and directed wrongful transactions,'' said Rep. Shim Sang-jeong of the Democratic Labor Party.
Lee Han-deuk of the LG Economic Research Institute said the slush fund case involving Samsung poured cold water on local business group's attempts to expand their investment into banks.
He said public opinion had been tilting toward allowing conglomerates to own banks on expectations that it would encourage large business groups to expand investment and create jobs.
``However, the Samsung scandal has caused many to worry about the possible side effects, discouraging attempts to lift the investment regulation,'' Lee said.
Opinions are divided among government agencies on chaebol's ownership of banks.
The Financial Supervisory Service (FSS) has pledged to back the lifting of the regulation, saying doing so is a strategic choice to make the country's financial sector more competitive.
``Conglomerates have accumulated more than 360 trillion won in capital, but have been reluctant to invest because of so many anti-corporate rules, including one restricting chaebol's ownership of banks,'' former FSS Governor Yoon Jeung-hyun said.
In contrast, the Fair Trade Commission (FTC), the country's anti-trust body, has raised objection to chaebol ownership of banks.
``Conglomerates will have the tremendous economic power if they are allowed to own banks,'' said Lee Dong-gyu, a director at the FTC. ``The government should stick to the principle of dividing the corporate and financial sector to ensure fair competition and achieve balanced industrial development.''
Woori Stake Sale
The planned privatization of Woori Financial Group and the Industrial Bank of Korea has drawn keen interest from both foreign and Korean banks.
The government initially planned to sell its majority stake in Woori by March next year, but decided to lift a state-imposed deadline on the stake sale to sell the shares on the best possible terms.
The continued delay in the privatization of Woori reflects difficulty in finding potential buyers among domestic investors, with big conglomerates banned from buying a controlling stake in any bank.
Government officials said they won't block foreign investors' participation in the bidding, but some civic groups have raised opposition to the sale of Woori shares to foreigners, citing growing foreign stakes in domestic banks.
Woori's majority stakeholder, Korea Deposit Insurance Corp., is considering disposing of a 21 percent stake in Woori through a series of block sales next year. Then, the insurer plans to sell the remaining 52 percent stake in an open competition.
The government also plans to sell its stake in Industrial Bank as part of efforts to reform state-owned financial firms. It is expected to announce the exact schedule on the sale early next year.
Capital Market
The Capital Market Consolidation Act will provide crucial opportunities for the country to nurture global investment banks and develop the financial industry to a global standard.
Banks have acquired or launched bids to buy small-sized brokerage firms amid expectations that the Act will boost demand for investment banking and securities-related businesses.
Kookmin Bank, the country's largest lender, recently took over Hannuri Investment & Securities, a small Seoul-based brokerage firm, while some of its rival banks are seeking to set up their own securities arms or buy existing companies.
Analyst say the Act will ignite a ``big bang,'' ultimately changing the financial landscape for more competition and transparency, while encouraging more merger and acquisition activities to create global investment banks.
Besides promoting mergers between financial firms to create global investment banks, regulators say financial companies should boost human resources and establish a sound system in areas such as management and accounting. To that end, the government is positively considering issuing brokerage licenses to financial firms and conducting programs aimed at fostering bigger securities firms.