Government urged to ease bank investment rules
Sunday, 8 July 2007
Song Jung-a and Anna Fifield from Seoul
South Korea's top financial regulator has called for the government to ease restrictions banning conglomerates from becoming leading shareholders of local banks, saying that "idle capital" should be allowed to flow into the financial industry.
Yoon Jeung-hyun, the head of the Financial Supervisory Commission, called the restrictions "silly" in terms of efficient allocation of capital, adding pressure on the government to permit the country's powerful chaebol to invest in the financial sector amid growing concerns over the increasing influence of foreign capital in Asia's third-largest economy.
"For such a small country as Korea to survive in international competition, it is important to efficiently allocate limited resources," he told a news conference last Thursday, noting that cash reserves at Korean companies available for investment amount to over $391bn. "We should open the way for idle capital in industrial groups to flow into the financial industry."
While no immediate change in the rules is looming, the controversy over whether the wall between finance and industry should be removed is likely to continue to gather pace. The issue is expected to be a primary one in the December presidential elections as the government is required to sell its controlling stake in Woori by March next year and will likely want the bank to remain in local hands, given prevailing economic nationalism.
Some lawmakers from the Grand National Party, which polls predict is likely to win the next election, have put forward legislation that would raise the ceiling on how much of commercial banks non-financial companies are permitted to own from 4.0 per cent to 10 per cent.
Current banking restrictions limiting non-financial companies' stakes in commercial banks are aimed at preserving the separation of the financial and industrial sectors. The 1997 Asian financial crisis underlined the need for such a rule as the collapse of large swathes of the industrial sector took several banks to the point of bankruptcy, even with the limitations in place.
The comments by Mr Yoon, who has repeatedly suggested that foreign influence in the financial sector must be kept in check, appear to be linked to a desire to see a Korean financial institution flourish internationally, as Samsung has done through electronics and Hyundai with cars.
A decade on, there has been some superficial change but the chaebol continue to exercise overwhelming influence across the economy. Conglomerates such as Samsung and Hyundai have spread into the insurance and securities sectors but cannot invest in banks themselves. The chaebol and an increasing number of lawmakers have been pressing the government to loosen the regulations to revive sluggish corporate investment, but the finance ministry has said that the wall is still needed.
The debate was rekindled recently by the looming sale of Korea Exchange Bank, expected to earn the US private equity fund Lone Star about $3.0bn in profit, and the imminent privatisation plan for Woori Financial Group, the country's third-largest lender. "Under the current circumstances, we see reverse discrimination against domestic capital. If we strictly abide by the regulations, who can buy Woori?" Mr Yoon said.
His comments reflect growing concerns that Woori too may fall into foreign hands as no domestic financial institution has enough capital to buy the financial group, whose market capitalisation stands at $21.2bn. The government, which has a 73 per cent stake, has made little progress in finding a strategic buyer for Woori.
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— FT Syndication Service
South Korea's top financial regulator has called for the government to ease restrictions banning conglomerates from becoming leading shareholders of local banks, saying that "idle capital" should be allowed to flow into the financial industry.
Yoon Jeung-hyun, the head of the Financial Supervisory Commission, called the restrictions "silly" in terms of efficient allocation of capital, adding pressure on the government to permit the country's powerful chaebol to invest in the financial sector amid growing concerns over the increasing influence of foreign capital in Asia's third-largest economy.
"For such a small country as Korea to survive in international competition, it is important to efficiently allocate limited resources," he told a news conference last Thursday, noting that cash reserves at Korean companies available for investment amount to over $391bn. "We should open the way for idle capital in industrial groups to flow into the financial industry."
While no immediate change in the rules is looming, the controversy over whether the wall between finance and industry should be removed is likely to continue to gather pace. The issue is expected to be a primary one in the December presidential elections as the government is required to sell its controlling stake in Woori by March next year and will likely want the bank to remain in local hands, given prevailing economic nationalism.
Some lawmakers from the Grand National Party, which polls predict is likely to win the next election, have put forward legislation that would raise the ceiling on how much of commercial banks non-financial companies are permitted to own from 4.0 per cent to 10 per cent.
Current banking restrictions limiting non-financial companies' stakes in commercial banks are aimed at preserving the separation of the financial and industrial sectors. The 1997 Asian financial crisis underlined the need for such a rule as the collapse of large swathes of the industrial sector took several banks to the point of bankruptcy, even with the limitations in place.
The comments by Mr Yoon, who has repeatedly suggested that foreign influence in the financial sector must be kept in check, appear to be linked to a desire to see a Korean financial institution flourish internationally, as Samsung has done through electronics and Hyundai with cars.
A decade on, there has been some superficial change but the chaebol continue to exercise overwhelming influence across the economy. Conglomerates such as Samsung and Hyundai have spread into the insurance and securities sectors but cannot invest in banks themselves. The chaebol and an increasing number of lawmakers have been pressing the government to loosen the regulations to revive sluggish corporate investment, but the finance ministry has said that the wall is still needed.
The debate was rekindled recently by the looming sale of Korea Exchange Bank, expected to earn the US private equity fund Lone Star about $3.0bn in profit, and the imminent privatisation plan for Woori Financial Group, the country's third-largest lender. "Under the current circumstances, we see reverse discrimination against domestic capital. If we strictly abide by the regulations, who can buy Woori?" Mr Yoon said.
His comments reflect growing concerns that Woori too may fall into foreign hands as no domestic financial institution has enough capital to buy the financial group, whose market capitalisation stands at $21.2bn. The government, which has a 73 per cent stake, has made little progress in finding a strategic buyer for Woori.
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— FT Syndication Service