(News Focus) Eased bank ownership rules spark debate

SEOUL, July 23 (Yonhap) -- Controversy is brewing again in South Korea over a new law that allows industrial groups to take a bigger stake in financial holding companies, paving the way for them to become major shareholders in domestic banks.

Defying an opposition boycott, the ruling Grand National Party steamrollered a
disputed bill through parliament Wednesday, which permits industrial groups to
hold up to a 9 percent stake in holding companies controlling bank affiliates, up
from the current 4 percent. The bill will go into effect on Oct. 10.
Under Korean banking law, 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$1.6 billion).
The easing of bank ownership rules was one of President Lee Myung-bak's campaign
pledges, which he said will help boost the competitiveness of the local banking
industry. Lee took office in February 2008.
The bill's passage meant bank ownership rules were eased for the first time since
1995 when the government lowered the cap to 4 percent from 8 percent to keep
conglomerates from strengthening their grip on commercial banks.
Proponents said the eased ownership rule would help accelerate the privatization
of state-run financial institutions and allow financial firms to raise their
capital by drawing investment from industrial groups.
"If a (financial) crisis takes place, industrial capital could be also tapped to
recapitalize banks, which would help ease the burden of using taxpayers' money,"
the Financial Services Commission (FSC), the country's financial watchdog, said
in a statement.
The government plans to sell stakes in three state-run financial institutions in
the long term -- Korea Development Bank, Woori Finance Holdings Co. and the
Industrial Bank of Korea. The FSC said it would be easier for the government to
find investors for those banks if non-financial companies are permitted to
increase their stakes.
The government has also argued that by drawing more money from industrial groups,
it would be easier for local banks to raise capital and expand their lending
capacity amid the slumping economy. Korean banks have raised 4 trillion won in
capital by tapping a 20 trillion won bank recapitalization fund.
But critics warned that eased rules would only help conglomerates, or chaebol,
gain control of banks, through which they could easily get credit for
unsustainable expansion.
"It is worrisome that economic concentration by bigger business groups may be
strengthened due to the eased regulation," said People's Solidarity for
Participatory Democracy, a civic organization.
Civic groups also argue that South Korea is bucking a global trend under which
many countries try to stiffen financial supervision and regulation as lax
regulation and oversight have been blamed for sparking a global financial
meltdown.
Under the bill, which will take effect in December, financial services companies
whose focus is the insurance or securities business will be allowed to hold
non-financial affiliates including manufacturers.
Currently, South Korea has five financial holding companies controlling bank
affiliates, including Woori Finance Holdings Co. Under a holding firm system, it
is easier for financial companies to seek further takeovers and to develop and
sell a wide range of financial products.