By Kang Seung-woo
Staff reporter
The subprime mortgage crisis has given the financial industry many lessons, with one of them being that bigger is not necessarily better for a bank.
The Korean banking industry, as well as regulators, has been almost convinced about this newly-acquired wisdom, their megabank plan being put on the back burner. But now, Euh Yoon-dae, nominee for chairman of the KB Financial Group, is pushing the megabank debate back to square one.
As soon as Euh was nominated, the former Korea University president talked about the possibility of KB taking over Woori Financial Group or the Korea Development Bank. After receiving a rap on the wrist for talking about his plans even before his nomination was made final, Euh backtracked a bit, saying he was not in a hurry. "We still have time before the government-set deadlines for banking sector privatization," he told The Korea Times. But this didn't mean that Euh has changed his mind, observers say.
The megabank push was one of the key pledges of the Lee Myung-bak administration, with former Finance Minister Kang Man-soo and former Vice Strategy and Finance Minister Choi Joong-kyung squarely behind it. Kang still wields strong influence on Lee's economic policy, while Choi is Lee's senior secretary for economic affairs.
They insisted that Korean banks should beef up their size and emerge as global players to compete with international lenders.
Those who are in favor of megabanks say that since most local banks have focused on retail banking operations, they are vulnerable to external shocks and lag behind in terms of global competitiveness.
When it comes to the Trans Nationality Index (TNI), based on leading multinational companies' composite ratio of employment, revenue and assets in foreign and domestic markets, local banks logged just 11 percent, compared to 76.5 percent for UBS, 43.7 percent for Citigroup and 28.9 percent for Mitsubishi UFJ Financial Group, which means that the they have a long way to go to become global.
In addition, as local banks do not play up to the nation's economic volume, the push for a merger between financial institutions has also been increasing.
Korea, Asia's fourth-largest economy, placed 15th in terms of gross domestic product (GDP) in 2008, but Woori Finance, the nation's highest-ranked player, came in 81st in the world rankings of assets.
Right after his nomination, Euh declared the need for a giant bank proportionate in size to the country's economy.
"The Korean banking sector lags in competitiveness on the global stage and it is often suggested that the country needs a large bank, which would rank within the world's top 50," he said. "We need a bank as competitive and globally-recognized as Samsung Electronics."
However, naysayers argue that the initiative challenges a global trend toward trimming down banks in the wake of the recent global financial crisis.
The United States and European countries have tried to propose new rules to regulate banks that are "too big to fail" and want to discuss it at the G-20 Summit, which will be a hard blow to Korea, the host of the November meeting.
According to the Industrial Bank of Korea (IBK) Economic Research Institute, the assets of the top two banks made up 53.5 percent of GDP and the combined top three represented a whopping 78.3 percent in 2008.
In this respect, critics believe that a setback for a super-size bank will shake up the financial sector and the country's economy.
It is not of a complete consensus about a megabank among top regulators.
"Samsung Electronics did not become competitive because it was big. Samsung became big because it was competitive," Financial Services Commission (FSC) Chairman Chin Dong-soo told reporters in late April.
"And, financial firms are different from manufacturing firms in that it is difficult for them to achieve significant growth in a short period of time."
Market analysts say that any megabank deal may be off the cards for now.
"I think Euh is the right one to pursue KB's globalization and mergers and acquisitions (M&A), but I am not sure if there will be any potential synergy if KB takes over Woori because both work in the same areas" said Jeon Hyo-chan, a research fellow at the Samsung Economic Research Institute (SERI).
"If KB wants to emerge bigger, it should go abroad," he said.