[Viewpoint]Ease rules on bank ownershipDuring the presidential campaign, the candidates expressed very different attitudes about the separation of finance and commerce.
President-elect Lee Myung-bak was the only one to promise to ease restrictions. Now that Lee will become the next president, the public wants to know how those regulations will be relaxed, and by how much.
The separation of finance and commerce is based on the separation of banking and commerce, which restricts mutual investment between commercial firms and banks, considered to be the cause of the Great Depression in 1929.
The separation also includes ownership restrictions designed to prevent conglomerates from holding too much economic power.
According to the Banking Act, a general commercial firm with total assets of more than 2 trillion won ($2.13 billion) cannot hold more than 4 percent of a commercial bank that gives its shareholders voting rights. Therefore, most large domestic companies cannot own a bank.
As a result, most major banks are owned by the government, individual investors and foreign funds. Surveillance on the capital market is active in the United States, Australia and Canada, and these nations strictly enforce the separation of banking and commerce. Other countries allow commercial ventures to own banks.
In Korea, another law related to this issue is Article 24 of the Act on the Financial Industry Restructuring. According to one clause, when a financial institution affiliated with a conglomerate wishes to acquire more than 5 percent of a commercial firm, it must get approval from the Financial Supervisory Commission. Also, the revised Fair Trade Act restricts a conglomerate-affiliated financial institution’s voting rights by limiting its stake in a commercial subsidiary to 15 percent. Moreover, the Financial Holding Company Act prohibits a financial holding company from holding a stake in a large commercial company.
Korea is the only country in the world to enforce the separation of finance and commerce, restrict voting rights and require the separation of banks and commerce. The rules also prevent industrial capital from flowing into the financial industry.
The upside of the system is increased stability for the economy. A breakdown of one industry will not lead to a collapse of the banking industry. The downside is the system obstructs a free flow of capital into the financial industry, which falls behind as a result. In addition, the system makes it easy for foreign capital firms to rule over the banking industry.
In order for Korea’s per-capita national income to grow beyond $30,000, we need to start a new growth engine. China and Japan are working on financial innovations by breaking backward restrictions. Korea is sandwiched between the two regional powers, both in manufacturing and the financial industry. We need drastic measures to nurture the financial industry as a new growth engine and to prevent it from falling behind.
At the moment, abundant capital and globalized capacity are concentrated in the manufacturing sector. The nation made it a top goal to achieve the same thing in the financial industry.
In order for financial institutions, especially banks, to be internationally competitive, they should make the best use of the manufacturing sector’s capital, globalized workforce and international network. However, that is not possible because big commercial firms are not allowed to own banks. If direct ownership cannot be approved right away, we need a more gradual measure.
The government could allow multiple commercial firms to own a bank through indirect investments, such as private equity funds. In those cases, we could halt possible unfair practices that might arise when certain commercial firms own a bank.
Furthermore, the separation of finance and commerce needs to be relaxed in the near future. Since the foreign currency crisis, the supervision of the healthiness of financial institutions has gotten stricter and the corporate management structure has grown far more transparent.
As privileged loans have largely decreased, the related Fair Trade Act and Article 24 of the Act on the Financial Industry Restructuring should be abolished, except for the necessary parts needed to maintain healthy management of financial institutions. Moreover, the ban on a financial holding company’s possession of a commercial company should be partly relaxed to boost corporate investment.
The regulations defined by the Banking Act need to be narrowed; more investors should be allowed to acquire banks. The criteria that define a non-financial firm, that it have 25 percent of its capital in non-financial areas and total assets of more than 2 trillion, should be drastically expanded. In the long-term, the separation of finance and commerce should be repealed on the condition that a financial supervisory system capable of constantly checking and watching over unfair trades by major stakeholders in banks is established.
*The writer is a professor of business administration at Hongik University. Translation by the JoongAng Daily staff.
by Sonu Suk-ho