South Korea’s Regulators Eye Bank Sector Overhaul Amid Rising Interest Rates
Boosting Competition and Liberalizing the Banking Industry
In an effort to boost competition and liberalize the banking industry, South Korean regulators have established a task force to propose reforms to banks’ business conduct and capital buffers. The Task Force on Improving Management and Operating Practices of Banks and the Banking System was created in February following comments by Financial Services Commission Vice-Chairman Kim So-young that the banking sector has an “oligopoly structure.”
Introducing More Competition
Regulators have been exploring ways to introduce more competition in the banking sector, including:
- Allowing new internet-only lenders and regional institutions to enter the market
- Expanding the scope of services that fintech operators can provide
- Proposing measures to allow non-bank operators to offer a full suite of payment settlement functions
Driving Change with Global Dynamics
Anne Henow, an expert on South Korea’s financial system, says the changes are driven by global dynamics, including shrinking global liquidity and rising interest rates. Introducing more competition in the banking sector could help ease tight credit conditions.
Proposals for Reform
The task force is also looking into changes to banks’ remuneration policies, including a proposal to introduce a “say on pay” principle that would give shareholders a vote on bank executive compensation. Other proposals include:
- Increasing non-interest income through the provision of non-core services
- Encouraging potential overseas expansion
Balancing Competition with Financial Stability and Consumer Protection
Regulators emphasize that their efforts are aimed at balancing competition with financial stability and consumer protection. The commission and the Financial Supervisory Service are expected to announce specific regulatory measures in June 2023.
A Dominant Market Facing Change
South Korea’s banking sector has been dominated by a few large lenders, but regulators hope to introduce more competition through new entries from challenger banks and non-bank operators. However, experts say whether they will achieve this goal remains to be seen.
Promoting Competition in the Residential Mortgage Market
In related news, the commission is also considering developing a “loan transfer infrastructure” for residential mortgages to minimize interest rate pain facing households. This could help increase competition in the market and make it easier for consumers to access credit.
Overall, South Korea’s regulators are taking steps to liberalize the banking industry and promote competition. While there are risks involved, experts say that these changes could ultimately benefit consumers and the economy as a whole.