Internet bank critics allege ‘special privileges’ were given

In the past few months, Korea’s financial authorities have been pushing to approve more internet banks amid the success of the country’s first two internet banks, but voices are growing louder for stricter regulations.

Some critics of internet banks are demanding that authorities retract the license for K bank, Korea’s first internet bank launched in April, saying it was given special privileges in the approval process.

“If we compare it to college admissions, K bank was admitted to a university as a student athlete without any awards or medals,” Jun Sung-in, an economics professor at Hongik University, said during a meeting hosted by Je Youn-kyung, a lawmaker from the liberal Democratic Party, on Wednesday.

Jun was referring to an allegation that Woori Bank, the main shareholder of K bank, failed to meet legal requirements to launch K bank during the approval process in October 2015.

K bank was created through a consortium led by telecom company KT, but KT is not the largest shareholder in K bank as per banking rules that limit the stake that non-financial companies can have in a bank.

The law requires that the main shareholder of a new bank seeking government approval have a BIS capital ratio above the market average. Woori Bank’s BIS capital ratio for the third quarter of 2015 was reportedly at 14.01 percent.

The market average during the same period was 14.08 percent. The allegation was raised in July by Kim Young-joo, currently the minister of employment and labor.

“[The authorities] must investigate the case and deal with it in accordance with the banking act,” Jun said. Penalties for falsifying records during the approval process include the Financial Services Commission suspending business for up to six months and revoking the bank’s license to operate.

Kwon Young-june, a professor of business administration at SUNY Korea, made a similar argument. “The Financial Services Commission must consider all the administrative options, including cancellation of establishment [of K bank].”

Despite the accusations, the Financial Services Commission says there was no special treatment or privileges given to K bank in the approval process. Park Kwang, an official at the commission, said that the reference period to compare the BIS capital ratio wasn’t clearly indicated in the regulations, meaning Woori Bank using a ratio from outside the third quarter of 2015 was not a violation.

“Woori Bank requested legal interpretation [regarding the reference period] and we followed the necessary proceedings before granting approval,” Park said.

Panelists at the meeting also criticized the commission for applying lax regulations on internet banks in comparison to other banks. Right now, the commission is applying a legal framework that includes lower capital requirements.

“Safety regulations for low-cost carriers, for instance, are not relaxed [compared to full-service airlines]” Professor Kwon of SUNY Korea said.

Professor Jun of Hongik University said the capital required for internet banks ought to be higher than at conventional banks.

Another hot potato at the meeting was the law governing banking, especially the section that restricts non-financial companies from owning banks. The law was put in place to prevent private companies from exploiting access to customer deposits, but many have criticized the regulation, saying it bars tech companies like KT and Kakao, which operates Korea’s other internet bank, from holding a majority stake in online banks, undermining their ability to apply information technology to banking.

Choi Jong-ku, chairman of the Financial Services Commission, argued that internet banks are less prone to financial mismanagement and that the government should focus on the characteristics of online banks when considering revisions to regulations. Jae, the lawmaker, said it was dangerous to discuss the revision of banking regulations just for two companies.

Cho Hye-kyung, a researcher from the People’s Solidarity for Participatory Democracy, a group that monitors abuse of power, said giving such privilege to internet banks is unheard of in other countries with online banks.

BY CHOI HYUNG-JO, HAN AE-RAN [choi.hyungjo@joongang.co.kr]