South Korea, one of the world’s most vibrant economies, is witnessing an unprecedented shift in its banking industry. This comes as the government, to stimulate competition, is opening doors for new entrants into the banking sector for the first time in three decades. This move follows criticism of large bonuses paid to banking employees while the public grapples with rising interest rates.
Addressing the ‘feast’ of bonuses and banking monopolies
The criticism by President Yoon Suk Yeol of the banking sector’s “feast” of bonuses was a marked call to action. He pointed out that these institutions were amassing easy profits at public expense through the rate gap between deposits and loans, a situation that had to be rectified.
In response, the Financial Services Commission (FSC) announced measures to allow more online banks, grant commercial banking licenses to existing financial firms, and relax the loan-to-deposit rules for foreign banks’ local branches. This move has sparked expectations of higher competition, causing South Korea’s banking sub-index to fall slightly.
Daegu Bank, a regional banking unit of the DGB Financial Group, is likely to become the first beneficiary of the new rules as it plans to apply for a license to operate as a nationwide lender.
Invigorating competition amid criticism
These changes have been met with skepticism. Critics have voiced concerns that the measures are insufficient to significantly increase competition in the sector. Hwang Sei-woon, a Korea Capital Market Institute researcher, argues that blaming banks for legally dispensing generous bonuses from robust profits is not a reasonable approach.
Hwang also contends that it would be challenging for newcomers to become formidable rivals to established players without easing regulations on the business areas divided among banks, brokerages, and asset managers.
Traditionally, South Korea’s banking sector has been a restricted playground for the chaebol— family-controlled conglomerates such as Samsung and Hyundai, being barred from entering the sector. The government fears they could exploit their banking affiliates for illegal business expansion or to enrich major shareholders. Moreover, South Korean banks are prohibited from engaging in investment banking and asset management, making them primarily reliant on interest income.
Despite these issues, the South Korean government’s move to invite new players to its banking industry is a major step forward in changing the face of its financial sector. It remains to be seen how these reforms will impact the nation’s banking landscape and the financial well-being of its people. With these changes, South Korea is venturing into uncharted territory, navigating the path toward a more competitive and inclusive banking system.
