South Korea’s major lenders are staring at a fundamental shake-up to their decades-long dominance of the country’s commercial bank sector, following the introduction of new rules.
The South Korean Financial Services Commission (FSC) said in July that regional banks and ﬁnancial ﬁrms will be allowed to apply for nationwide commercial bank licenses. “The government will proactively consider new approvals if accompanied by sufﬁcient ﬁnancial resources and feasible business plans,” said Kim Joo-hyun, chairman of the FSC, in front of major ﬁnancial groups in the country.
So far, the top ﬁve national commercial lenders – Kookmin Bank, Shinhan Bank, KEB Hana Bank, Woori Bank and NongHyup Bank – are home to about 63 percent of South Korea’s $3.16 trillion in bank assets, and about three-quarters of deposits.
But this could change, as the FSC aims to introduce fair and effective competition into Korea’s banking sector and to bring greater beneﬁt to ﬁnancial consumers due to high interest rates, according to Han Jin Lee and Steve Song, attorneys at Kim & Chang.
The proposal “was announced in response to the government’s observation that the banking sector supplies services that strongly resemble ‘public goods,’ while maintaining an oligopoly resulting from a limited number of business licenses granted by the government,” note Lee and Song.
Under the proposal, the FSC wants to transform more regional banks - established to provide greater access to ﬁnancial services to a speciﬁc regional and rural areas – to national commercial banks, which are headquartered in Seoul and operate throughout the county without any regional restriction.
This came as South Korean President Yoon Suk-yeol criticised the big national banks for proﬁting from the gap between lower interest rates on deposits and higher ones on loans at a time of roaring borrowing costs tightening the screw on customers.
In addition, regulators will encourage M&A activities amongst mutual savings banks, which provide retail and small business banking on a limited scale. That includes offering time deposit and small credit to individual borrowers and small businesses at typically higher rates. Through inorganic expansions, the hope is for larger mutual savings banks to provide additional competition to the bank deposit and loan market.
“Such changes may bring new opportunities for Korea’s legal industry to advise on not only various issues, including licensing applications (so that regional banks can convert into commercial banks) and merger transactions between mutual savings banks, but also to advise on various ﬁnancial products and services due to increased competition amongst a larger number of market participants,” say Lee and Song. Although these new measures are expected to stimulate the market and make things harder for the big lenders, Lee and Song caution regulators against potential risk arising from such increased competition in certain areas such as markets for lending or taking deposits. Meanwhile, “in order to provide meaningful competition to Korea’s banking sector, the government should continue its efforts to promote greater competition and efﬁciency with respect to other market players such as security companies, FinTech companies and online banking service providers,” note Lee and Song.
The Kim & Chang duo believe greater competition in the banking sector will have a positive effect on the legal industry. “There will likely be a greater demand for highly skilled lawyers who can advise on complex regulatory issues, and in that sense, lawyers with experience working in other western jurisdictions that have sophisticated banking industries will continue to be in high demand,” they say. As the banking and ﬁnance world moves towards digitalisation while embracing emerging technologies, Lee and Song believe the proposal is South Korea’s answer to the increased competition between traditional banking sectors and new areas such as cryptocurrency, FinTech, and decentralised ﬁnance (DeFi).
The proposal “is part of the Korean government’s efforts to upgrade Korea’s traditional banking sector by increasing competition so that traditional banks can better adapt to the world that has embraced digital ﬁnance,” say Lee and Song.
And law ﬁrms with the necessary vision are well-positioned to take advantage of that transition journey. “Law ﬁrms will continue to play a crucial role in supporting traditional banks in their efforts to become more competitive and innovative, but at the same time, the advent of digital ﬁnance provides law ﬁrms with the opportunity to work with tech companies and non-banking players that are looking to enter the ﬁnancial sector,” note Lee and Song.