South Korea's financial regulator hopes allowing new entrants into the banking sector for the first time in three decades can dilute the dominance of a handful of large players. Instead, innovation may be the real solution.
Five local banking groups — KB Financial Group Inc., Shinhan Financial Group Co. Ltd., Hana Financial Group Inc., Woori Financial Group Inc. and NongHyup Financial Group Inc. — dominate the country's banking industry. In terms of market share, they held 74.6% of total assets as of March 31, according to S&P Global Market Intelligence data.
South Korea's Financial Services Commission (FSC) in July announced a slew of measures to boost competition in the local banking industry, including allowing new players to enter the commercial banking space. The regulator said it would permit regional banks to obtain commercial banking licenses and also allow internet-only banks and other types of specialized banks.
However, experts are unconvinced this will significantly boost competition.
"It is not likely to increase competition by simply adding more commercial banks in the market," said Seiwoon Hwang, a senior economist at Korea Capital Market Institute. "The big five commercial banks in [the] Korean financial market have [a] high level of market power. They have wide business networks and deep client bases, so that the regional banks and internet banks will have difficulties taking away clients from the big five."
The regulator's plan came after President Yoon Suk Yeol in February accused banks of booking easy profits at the public's expense and rewarding their executives with hefty bonuses even as borrowers suffer from high interest rates. The quintet of big banks saw a 5.3% year-over-year gain in net profits in 2022 when the central bank raised interest rates at an accelerated pace. They paid 1.38 trillion won in bonuses in 2022, up 35% year over year, The Korea Herald reported Feb. 14, citing data provided by the country's Financial Supervisory Service provided to the Democratic Party of Korea's Rep. Hwang Un-ha.
Innovation, regulation
To promote competition — given the major banks' high level of market power — regulators should instead encourage financial technology companies to innovate, analysts said.
"It would be better to find solutions for the market power problems through financial innovations by new-coming fintech companies, even though this approach may need more time," Hwang told Market Intelligence.
In announcing the reform measures on July 5, the FSC cited a view among the public that banks were reluctant to make changes because of their easy profitmaking structure. It said the main purpose of the measures was to promote market-driven competition in the sector.
The regulator's move is a signal that it is keen to boost competition, indirectly putting pressure on major banks not to raise loan interest rates excessively on households and small businesses, said Michael Makdad, a senior analyst at Morningstar.
"But I'm not sure how effective such indirect pressure would be," Makdad said.
Rather, regulators should set guidelines or regulations to restrict major banks' clout, said Takahide Kiuchi, executive economist at Nomura Research Institute.
Regional banks in spotlight
The regulator's announcement put a spotlight on the country's six regional banks, though doubts remain as to how many are qualified and how many will apply for commercial bank licenses. For now, only one will likely throw a hat into the ring.
"They [South Korean regional banks] may not meet all of the [FSC] requirements" to be upgraded to a commercial bank, said Makdad.
The regulatory requirements for a regional bank to meet and expand into commercial banking include having more than 100 billion won in capital, a shareholders qualification, a business plan and facilities, including an IT system, sufficient to operate a banking business, according to Yulchon LLC, an international law firm in Seoul.
The FSC did not respond to a request seeking details about the requirements for a commercial bank license.
First to score?
Daegu Bank, a regional banking unit of DGB Financial Group Co. Ltd., may become the first beneficiary of the regulatory move. With capital of 700.6 billion won, it plans to apply for the commercial bank license, a spokesman at DGB Financial said. However, the spokesman added that the company has not yet taken a decision on the timing.
Kwangju Bank Co. Ltd. and The Jeonbuk Bank Ltd., regional banks of JB Financial Group Co. Ltd., are not interested in following suit at present, a spokesman at the holding company said. The two different holding companies that own the remaining three regional banks — Busan Bank Co. Ltd., Kyongnam Bank and Jeju Bank — did not respond to requests for comments.
