Time to Break with Past Frame
Financial Services Commission (FSC) Chairman Choi Jong-ku stressed the need to ease banking-commerce separation on July 11.
“South Korea adopted banking-commerce separation back in 1982 in the process of privatizing the previously state-owned banks. It was intended to prevent chaebol from using banks as their private safes,” the FSC chairman said at a forum held at the National Assembly. He added, “Now, however, we need to review it as the national economy has grown in size and its systems have advanced.” To illustrate his point, the top regulator cited the diversified corporate financing methods, strengthened monitoring of large business groups, and better financial supervision and regulation.
Choi’s call for a change comes against the backdrop of the difficulties that Korea’s direct banks (or internet-only banks) suffer due to the strict banking-commerce separation. These banks, which were established last year under the government’s plan to reform the banking industry, have failed to live up to the expectations amid a host of hurdles impeding their operations. For instance, they could not expand their capital due to the regulations restricting industrial companies’ shareholdings in banks.
Choi’s views were echoed by the ruling Democratic Party, which has refrained from bringing up the issue not to disturb the Blue House (Presidential Office). The party said what matters now is how to invigorate the economy using fintech companies rather than how to prevent the side effects of industrial capital’s ownership of banks.
Rep. Jung Jae-ho of the party said, “Direct banks can be a nice tool for achieving innovative and income-led economic growth, and we need to focus more on its positive effects such as contribution to the financial industry and national economic growth.”
Kim Woo-jin, a researcher at the Korea Institute of Finance, pointed out at the forum the urgent need for the direct banks to expand their capital. In their early stage, he said, the banks are bound to rely on deposits for financing and, as such, they cannot avoid interest rate competition to attract customers. But this inevitably results in an increase in financing cost. Consequently, he noted, both K-Bank and Kakao Bank are currently in the red and the possibility of insolvency cannot be ruled out as the banks have already provided a large amount of medium-interest loans. To avert such a possibility, he stressed, the two banks should be allowed to expand capital.
Professor Maeng Soo-suk at the Chungnam National University Law School, however, called for a prudent approach to the matter. “Easing the separation of banking and commerce may lead to concentration of economic power and irregularities such as companies raising slush funds, in light of the distinct characteristics of South Korea’s chaebol structure,” he said, adding, “Conglomerates in Korea already have too much economic power, and a bank controlled by an industrial company could do more harm than good.” He continued to say, “Given that direct banks’ growth could be limited without timely capital expansion, possible options include exempting them from the principle of banking-commerce separation to allow them to expand capital.”