South Korea’s financial regulators are exploring ways to increase competition in the sector and break the dominance of the biggest lenders. James King reports.
In February, following comments by South Korean Financial Services Commission vice-chairman, Kim So-young, that the banking industry has an “oligopoly structure”, the commission and the Financial Supervisory Service have established a joint task force to propose reforms to banks’ business conduct and capital buffers, while pursuing a wider liberalisation of the market.
The creation of the new body – known as the Task Force on Improving Management and Operating Practices of Banks and the Banking System – came after Mr Kim highlighted criticisms facing South Korean lenders as they reap greater profits in a rising interest rate environment, in comments reported by the Korea Times.
During the task force’s first working group meeting, held on March 3, regulators discussed the licensing and entry of challenger banks and new internet-only lenders, as well as new regional and nationwide institutions, to the market. Measures to stoke competition between bank and non-bank institutions were also explored, including expanding the scope of services that fintech operators can provide, along with proposals to allow non-bank operators to offer a full suite of payment settlement functions.
The motivations driving these discussions are diverse. But according to Anne Henow, an expert on South Korea’s financial system, a changing macroeconomic backdrop could be forcing regulators’ hands: “In part, the [discussed] changes are a result of global dynamics. With interest rates rising continuously, global liquidity continues to shrink, affecting economies worldwide. In turn, businesses in South Korea and elsewhere experience higher borrowing costs.
“Introducing more competition in the banking sector could be a way to ease such tight credit conditions. In this case, policy-makers appear to be ready to accept a higher degree of financialisation to offset current dynamics in the global financial system,” she continues.
Affirming this point, the commission’s Mr Kim highlighted the need to develop a “loan transfer infrastructure” for residential mortgages during the working group’s second meeting on March 9, to minimise interest rate pain facing households through increased competition.
The task force is also looking into changes to banks’ remuneration policies. This includes a proposal to introduce a “say on pay” principle in South Korea that would give shareholders a vote on the pay received by bank executives, as well as new rules on bonus structures in the country. Other proposals include an ambition to boost banks’ non-interest income through the provision of non-core services and to encourage potential overseas expansion.
Increasing competition from non-banks is a critical step in liberalising the Korean financial sector
Taken together, these and other changes could have a meaningful impact on the country’s wider financial services market. In a legal update published by leading Korean law firm, Yoon and Yang, its partners note: “The tasks discussed in relation to improving the management and operating practices of banks and the banking system are matters that may have a great impact on the work scope and business environment of financial services companies, platform businesses and virtual asset service providers.”
Although the regulators’ discussions are wide in their scope, the working group also emphasises financial stability and consumer protection. For Ms Henow, this finely tuned balance reflects the “pragmatic policy mix” that is typical of South Korea and its post-Asian financial crisis development trajectory.
“Increasing competition from non-banks and allowing new market entries from so-called ‘challenger banks’ and others is a critical step in liberalising the Korean financial sector. However, the proposal also emphasises the need to balance market forces with the overall goal of retaining economic and financial stability. Whether they will achieve that, remains to be seen,” she says.
The commission and the Financial Supervisory Service are expected to announce specific regulatory measures based on the discussions of the joint working group in June 2023.
