(EDITORIAL from the Korea Herald on Sept. 29)

No viable alternative

The Korean government envisioned modeling a few of its domestic financial institutions after leading U.S. investment banks when a law on capital market consolidation was enacted in July of last year. The law, scheduled to take effect next February, makes it possible to establish "financial investment companies," or investment banks engaging in multiple finance businesses -- such as securities
brokerage, futures trading, asset management and others.

The recent collapse of Lehman Brothers and other U.S. investment banks, however,
raises questions about the wisdom of pushing ahead with consolidating capital
markets and removing many of the rules separating commercial and investment
banking. Moreover, critics are raising their voices in opposition to the
government's plan to privatize the Korea Development Bank -- an initial step
toward turning the state-invested development bank into a leading investment
bank.
It is not just diehard anti-neoliberal economists that are attacking the
government policy of removing restrictions and consolidating single-sector
companies into providers of multiple financial services. Opposition lawmakers are
also demanding the law on capital market consolidation be revised to ensure
prudent regulations.
But opposition lawmakers are divided in their opinions regarding the proposed
privatization of KDB. Some are vehement in opposing the plan while others are
demanding a privatized KDB that will also engage in commercial banking, as
Goldman Sachs and Morgan Stanley are planning to do by turning themselves into
bank holding companies subject to greater regulation.
Division in opinion is also found in the ruling Grand National Party -- a
development that should be welcomed rather than frowned upon. The party should
make no attempt to smother lively debate in the name of unity.
Many lawmakers close to President Lee Myung-bak insist that there be no
backpedaling in deregulation. They also demand that the National Assembly speed
up the process of passing additional bills for financial deregulation set to be
submitted soon by the Lee administration.
Some other ruling party lawmakers advise caution and call for more stringent
supervision from regulators. They acknowledge that it is necessary to revise the
law on capital market consolidation before it goes into effect.
It may take some time before the rival parties adopt an official policy on the
issue. Before they take a unified stand, the administration would do well to
reflect on the cause of the U.S. financial crisis and its impact on the Korean
financial industry. It will also have to study what remedial measures it needs to
take in connection with capital market consolidation.
The administration must take all necessary measures if it wishes to ensure that
the law will have no unintended consequences that wreak havoc on the domestic
financial industry. One idea that merits serious consideration is to hold public
hearings with the participation of economists and market players.
No matter what conclusion the administration eventually reaches, there should be
no change in the basic premise of fostering the domestic financial industry
through deregulation. The administration will have to push ahead with its plan to
make Korea a financial powerhouse in Northeast Asia.
Jun Kwang-woo, chairman of the Financial Services Commission, was right when he
said last week that deregulation will make the financial sector more competitive.
He also said that privatization must proceed as scheduled.
The Korea Development Bank must be placed at the top of the list of state-owned
financial corporations to be privatized. There is no viable alternative to
changing it into an investment bank, either as a stand-alone or as one that also
provides commercial banking services. The reason is that investment banking will
be a core part of global financial services after the Wall Street shakeup, just
as it was before.
(END)