By Samantha Barnes, International Banker
The harsh condemnation meted out by President Yoon Suk Yeol of the humongous profits reaped by South Korea’s biggest financial firms whilst the country suffered under a biting cost-of-living crisis resonated across the country. A weekly meeting between the South Korean president and his senior secretaries in February paved the way for him to instruct the main financial regulator, the Financial Services Commission (FSC), to draw up measures to ensure “the people do not feel out of place due to banks’ money feast”. The early-July decision to allow new domestic entrants into the banking sector for the first time in more than 30 years is a crucial component of this process, and it could soon spell the end for the oligopolistic structure of South Korea’s banking sector.
At the centre of the president’s criticism lies the ballooning interest margins that banks have been enjoying at the public’s expense, charging far higher rates on loans than they were giving on deposits and paying exorbitant bonuses to their executives. “The people’s suffering is great due to banks’ high interest rates,” the president was quoted as saying in February, describing the Korean banking sector as an oligopoly that had caused significant damage. “Banks have the nature of a public good, so it is appropriate for them to use their profits to help struggling people, the self-employed and small business owners through so-called win-win financial benefits, and to build a solid reserve in case of future instability in financial markets.”
Indeed, last year’s combined net income of South Korea’s five largest banks—Shinhan Bank Co., KB Kookmin Bank, Hana Bank, Woori Bank and NongHyup Bank—was KRW12.7 trillion (US$9.8 billion), a hefty 18 percent higher than the previous year. Lenders also generated record profits during the COVID-19 pandemic and “paid their interest income as bonuses and dividends for employees and shareholders rather than returning it to citizens”, the FSC explained in its statement. On the compensation side, meanwhile, around two trillion wones were doled out in bonuses last year, much of it in the form of performance-sharing and early-retirement rewards.
As such, President Yoon Suk Yeol called on financial regulators to develop solutions requiring the country’s lenders to ease the mounting cost-of-living challenges experienced by vulnerable households and businesses. In response, the FSC and the Financial Supervisory Service (FSS) conducted several meetings with key industry leaders, including private-sector executives, financial-industry authorities and research institutions, to explore what needed to be done to improve competition within the banking industry—something that has been sorely lacking for decades.
Perhaps the most effective solution is the July 5 decision allowing domestic entrants to enter the banking sector for the first time since 1992 and regional banks to expand their business operations more liberally throughout the country. “For the first time in 30 years, a new nationwide bank can be established. This change is meaningful as the new nationwide bank can have its headquarters not in Seoul but in another regional city,” the FSC’s chairman, Kim Joo-hyun, noted upon announcing the new rules. “We will boost competition in various aspects as our banking industry has made easy money amid a lack of competition. The public perception is that the industry has not made enough effort to become global financial players suitable for the country’s economic standing.”
Local lender Daegu Bank is expected to submit its application shortly, and the FSC has noted that it will likely become the first beneficiary of the new rules. With a licence possibly being granted within a year or so of a regulatory review of its application, Daegu Bank will be permitted to open branches nationwide and grant loans to big companies, despite operating only as a regional banking unit of the DGB Financial Group. As such, Daegu is expected to become Korea’s first new commercial bank in 31 years, thus representing a landmark in efforts to potentially end the dominance of the country’s big five lenders. “If we obtain a commercial bank license, we will reinvest the profits and capital from nationwide operations into the local economy, as a representative bank in the region,” Kim Tae-oh, chairman of DGB, recently confirmed.
And the FSC has been keen to stress that it’s not simply a narrow set of traditional firms that will benefit from the regulatory overhaul. Rather, it actively seeks to promote broader licencing of new commercial, regional and even internet banks. “Our goal is to transform the banking sector into a competitive market where any player can enter as long as they have sufficient financial resources and a viable business plan,” the FSC’s vice chairman, Kim So-young, recently acknowledged. It is thus expected that a flurry of online banking institutions will soon enter the marketplace, while a broad range of financial firms can expect to obtain commercial-banking licences more easily. Regulators have also confirmed that they will continue to work with the central bank, the Bank of Korea, to enable financial firms to join the country’s payment network.
But some are not convinced that these new measures will adequately solve Korean banking’s competition issues. “Blaming banks for generous bonus payments made legally with handsome profits is not reasonable,” Hwang Sei-woon, a researcher at the Korea Capital Market Institute (KCMI), explained to the Financial Times on July 5, adding that new entrants would face difficulties in becoming serious competitors to the incumbents. “It is difficult to shake the current market dynamics without easing regulations on the business areas divided between banks, brokerages and asset managers.”
The FSC’s chairman, Kim Joo-hyun, separately stated that regulators want to create conditions in which non-bank financial firms and fintech (financial technology) businesses can compete with banks, specifically by promoting savings banks’ M&A (mergers and acquisitions) activities, strengthening the bonds between financial and IT (information technology) divisions to boost innovation and launching reform measures for financial holding companies. “Once we have the reform measures on financial holding companies, along with the measures for improving rules on the ancillary service system sought after since last year and the measures to promote competition in the banking industry all set in motion in harmony, I believe that our financial industry can develop as a major player in the world.”
Aside from rules concerning new market entrants, moreover, Korean banking regulators have also looked at potential solutions to address longstanding problems associated with the existing market structure. Soon after the president’s instructions were delivered in February, authorities launched a task force to examine ways to improve business practices and pay schemes within the country’s biggest banks, as well as measures to strengthen capital buffers against external shocks. While the biggest banks remain largely reliant on interest margins for the bulk of their incomes, the task force is actively considering how to diversify their business practices and improve their pay structures. That said, regulators will not interfere with financial firms’ decisions on shareholder returns. “We believe that Korea’s banking industry will be able to get more competitive and efficient, which will make the Korean financial markets more attractive to investors,” the FSS’s governor, Lee Bok-hyun, said in late February upon the formation of the group chaired by Kim So-young, which also comprises regulators, scholars, researchers and officials from financial-industry associations.
Soon afterward, the FSC confirmed it would expand its disclosures of information on loan-deposit rate differences to enhance transparency and, ultimately, competition in the banking sector. Although lenders were already providing loan-deposit spread data on new lending and savings to regulators from mid-2022 onward, the FSC now requires banks to additionally disclose the differences based on their balances. “Along with deposit rate differences, detailed interest rate information, such as loan rates (household loans and business loans) and deposit rates, all on a balance basis, will be disclosed,” the FSC stated, adding that it would revise relevant regulations and build a system to enforce the expanded disclosure rule by the end of July.
Local news outlet JoongAng Ilbo reported on June 14 that the country’s antitrust watchdog, the Korea Fair Trade Commission (KFTC), has investigated the country’s four largest banks: KB Kookmin Bank, Hana Bank, Shinhan Bank Co. and Woori Bank. The probe concerns potential collusion by the banks on the loan rates they were charging their customers, with allegations surfacing that there may have been improper information sharing or collaboration beyond acceptable boundaries. The investigation is the second of its kind this year, with the first targeting the same four banks along with NongHyup Bank, Industrial Bank of Korea (IBK) and the Korea Federation of Banks (KFB). South Korean news outlets have also reported that many banks have been lowering their lending rates this year since the president made his comments in February.