Current Political Hot Potato in the Financial Industry?
2009/08/05 9 Comments
So, what’s all the fuss about? (Q&A)
On July22, it has been announced that the Financial Holding Companies Act will be amended and it looks as though some major changes are going to occur. Well, let’s find out what they are and what will happen based on the newly amended Act.
Before we go on to see what the changes are in the Act, we need to understand what a “non-financial business operator” (NFBO) is. In short, it is literally the companies that are not directly linked to financial businesses, like Samsung or LG.
The reason why the Act had to be amended is because the restrictions were far too harsh for NFBOs to enter into financial businesses, even when the risks could be contained with much less restriction. Furthermore, if we segregate each sectors and regulate them according to their level of risk, it would provide a much rational approach to managing risks while cultivating advancements in the financial industry.
For example, when comparing a bus, a car and a bicycle, each vehicle has its own style and the amount of risk involved are all different. Thus, it is natural that different licenses are required. The bus carries a lot of people and it is difficult to drive one, so when we issue a license to drive a bus, we have to make it much tougher to pass the driving exam to ensure the safety of the passengers that will ride on it. Like issuing different licenses to operate different kinds of vehicles, financial regulation should be the same when dealing with businesses with different level of risk. I am referring to different kinds of financial holding companies such as a bank- holding company, non-bank financial holding company, and an insurance-holding company.
Let’s look at the issue in more detail~
Q 1. What is the Act all about?
- The amendments to the Act is about easing restrictions for NFBOs to buy bigger stakes in finance firms and to allow financial holding groups to hold manufacturing and other unrelated subsidiaries. To be more specific, it has two key points. First, the amended Act will allow NBFOs to hold up to 9 percent of shares in a bank, from the current 4 percent. In addition, the Act will also allow non-banking financial holding companies, such as one focused on securities or insurance business to take both financial and non-financial companies as subsidiaries or grandson companies.
Q 2. Why do we need this change?
- Oddly enough, for many years, Korean companies have been unfairly treated under the presumption that there must be a complete wall between industrial and financial capital. It is based on fears that industrial capital might gain control over banks, manipulating the banking system and eventually cause banks to fail and devastate public finances.
- And because of this belief, Korean banks were disadvantaged raising capital when they needed, and eventually were forced to be bought by foreign firms. This problem raised a concern that the restrictions had to be eased so that domestic companies can participate more freely when opportunities rise, not letting only foreign firms to benefit.
- Consequently, the revised law will prompt companies to channel fresh money into banks and other financial companies, which will lead to maximizing capital flow in the financial industry. As for manufacturers, they will benefit from banks having more money to lend. The amended Act which takes effect starting October will also help revitalize mergers and acquisitions among local financial holding companies in the long-term.
- It is also expected to develop the financial industry’s competence in the global market by upgrading its crisis management capability through broader source of funding.
Q 3. Some are concerned that under the amended Act, Chaebols will be able to control banks. Is it true?
- The short answer to that question is “no”. Considering the circumstances, upgrading the 4% share to 9% isn’t a big threat to banks. As a matter of fact, nearly all other advanced countries around the world keep the ratio to 10% shares and it is widely accepted as a safe guideline, which mean Korea’s regulation is far too strict comparing to the global standards. In order for Chaebols to have any control over banks’ operations, they would have to have much greater shares than 10%. It is proven in other countries and it would not be any different in Korea.
- Furthermore, the government has said that it will run a pre-screening process for companies which want to own more than 4% shares of a bank to ensure their motives are strictly for investing. And when they are approved, a post-monitoring process will be in place to constantly check if any illegal activity is in practice. So, it is safe to say there will be enough preventive mechanism to make sure the industry will not be negatively affected.
- It is necessary to release these inefficient policy and ease the restriction, which will upgrade Korean Economy competence. Instead, a more effective method of joint ventures within affiliated companies can be achieved through sharing their extertise in different areas of finance.