S. Korea to ease bank ownership rules

(ATTN: ADDS with more details, comments in paras 12, 18-29)
SEOUL, Oct. 13 (Yonhap) -- South Korea's financial watchdog said Monday the
government will allow industrial groups to hold bigger stakes in banks in a move
to beef up competitiveness in the banking sector and smoothly sell state-run
lenders.
Current regulations forbid a non-financial company or an industrial group from
holding more than 4 percent of shares with voting rights in a bank, while
financial firms are permitted to own up to 10 percent of a bank.
Under South Korean banking laws, a company is classified as an industrial group
if over 25 percent of its capital is invested in non-financial companies, or its
assets in such companies top 2 trillion won (US$1.56 billion).
"The government plans to raise the cap of bank ownership by an industrial group
to 10 percent, based on the strength of review process and post-supervision," the
Financial Services Commission (FSC) said in a statement.
"The move would help boost the competitiveness of the Korean banking sector and
bring about smooth privatization of state-run banks," the FSC said. The watchdog
plans to submit related bills to the National Assembly this year.
According to the FSC, the government will allow pension funds, private equity
funds (PEFs) and foreign banks to more easily invest in a bank.
Under current regulations, a private buyout fund is classified as a non-financial
firm when an industrial group invests more than 10 percent in the fund. The FSC
said it will raise the ceiling to 30 percent.
The watchdog also said it will not regard overseas non-financial assets held by a
foreign lender as industrial capital when a foreign bank itself is not controlled
by an industrial group.
Currently, a foreign bank is viewed as an industrial group even if its assets in
overseas non-financial companies top 2 trillion won.
Supporters said the move would help the government find investors for stakes in
three state-run financial institutions -- Korea Development (KDB), Woori Finance
Holdings Co. and the Industrial Bank of Korea (IBK). But critics argue that eased
rules would only help conglomerates or chaebol add a bank, through which they can
easily get credit for expansion.
The investment limit has been maintained as a sort of firewall to prevent any
problems that originate from the financial sector from hurting manufacturers or
vice versa.
The announcement is controversial because it come in the wake of the U.S. Lehman
Brothers debacle and worries about the "over-easing' of state control that have
been cited for triggering the current global financial-sector shock.
South Korea plans to start reducing its 100 percent stake in KDB next year and
fully privatize it by 2012 through share and private sales. KDB, 100 percent
owned by the government, was established in 1954 to provide financing for local
firms.
Considering market conditions, the government also plans to unload part of its
stakes in Woori and IBK. The government currently owns 73 percent of Woori
Finance and 57.7 percent of IBK.
Meanwhile, the FSC said it will allow holding companies focusing on the insurance
business to control non-financial subsidiaries like manufacturers, but not permit
them to hold non-financial units as grandchild companies. The move aims to
prevent such a holding company from using assets entrusted by policyholders in
expanding its business, the watchdog said.
But so-called financial investment holding companies will be allowed to put
non-financial affiliates under its wing as a grandchild firms. Financial
investment holding firms do not own bank and insurance subsidiaries with focusing
on the securities and other investment banking business.
South Korea's brokerage sector is set to undergo a sea of change as the new law
on capital market deregulation will go into effect in February 2009. The law is
designed to break down barriers separating the securities, futures and asset
management sectors and allow brokerage houses to play a bigger role in the
financial sector.
Critics said that the proposal, which had faced a number of delays, besides
bringing down a valuable safety mechanism, opens a window for serious distortion
of money flow between industry-centered companies and banks.
"If the measures are implemented, banks could become private lenders to chaebol
companies, creating an unfair market environment," said Democratic Labor Party
lawmaker Lee Jung-hee.
The main opposition Democratic Party also said it opposes tearing down the
firewall in light of current international developments and pledged to block its
passage.
"The announcement send conflicting signals since the U.S. financial crisis is
causing many to reassess how banks and other lenders operate," said Lee
Phil-sang, a professor at Seoul's Korea University.
The business management scholar said that because ownerships of banks is
generally diversified, handing over 10 percent to a single investor can allow
such companies to become the largest stock holder and effectively control the
lenders.
Advocates, however, countered that giving companies 10 percent control in a bank
does not translate into managerial control and said the move is overdue because
the current system made it impossible for local banks to compete with
multinational foreign institutions and limited the development of large domestic
financial institutions.
The Korea Chamber of Commerce and Industry and the Korea International Trade
Association hailed the move as a step in the right direction and anticipated that
overall business conditions that were unfavorable compared to competitors and
would improve that can help revive the economy.
Large conglomerates said they welcomed the move, but some said that they have no
plans to invest in banks.
Samsung Group, the country's largest family owned conglomerate has two insurance
companies under its wing and since neither of these firms plan to become holding
companies, any changes will not affect its business.
Hyundai Group also said that it is focused on building Hyundai Securities Co.
into a investment bank next year, and has no plans to buy shares in banks.
Others conglomerates like SK, Kumho Asiana, Hanwha groups all said that easing
restrictions were a step in the right direction.
Industry insiders said that most companies were taking a watch-and-see stance and
may call on the government to further ease restrictions on insurance and Security
companies.