US Financial Institutions Face Regulatory Hurdles in Korea
Despite efforts to liberalize its financial system, South Korea remains a challenging market for US financial institutions seeking to expand their operations.
Strict Bank Regulations
Bank regulations in Korea are strict, with a requirement to maintain Bank for International Settlement (BIS) capital adequacy ratios above 7%. Additionally, loan requirements for small and medium-sized enterprises (SMEs) and independent business owners are stringent due to high personal household debt-to-GDP ratio.
Alternative Sources of Funding
Foreign start-ups looking to invest in joint ventures often face difficulties accessing local currency financing, as branches of foreign banks control a tiny portion of the Korean won. However, there are alternative sources of funding available:
- Domestic commercial banks: Providing loans and other financial services to businesses and individuals.
- Regional banks: Offering specialized financial services to specific regions or industries.
- Specialized banks:
- Korea Development Bank (KDB): A government-owned bank providing financing for large-scale projects and industries.
- National Agricultural Cooperative Federation (NACF): A cooperative bank serving the agricultural sector.
- Industrial Bank of Korea (IBK): A specialized bank offering financial services to businesses and industries.
Payment Methods: A Key Challenge for US Businesses
For US companies seeking to export goods to South Korea, understanding payment methods is crucial. Common overseas payment methods include:
- Sight and deferred payment Letters of Credit (L/C)
- Documents against Acceptance (D/A) and Documents against Payment (D/P)
- Open Account Transactions
CS Korea recommends that US companies operate on a confirmed L/C credit basis with new and familiar customers to prevent unwanted changes to the original L/C and place responsibility for collection on the banks rather than the seller. After business relationships have strengthened over time, other payment procedures can be employed.
Financial Services Commission Plays Key Role in Regulation
The Financial Services Commission (FSC) plays a crucial role in regulating South Korea’s financial sector, supervising all banks, including specialized and government-owned banks, securities, and insurance companies. The FSC works closely with the Financial Supervisory Service (FSS) to ensure the stability of the financial system.
KORUS FTA Boosts Access to Korean Market
The KORUS Free Trade Agreement has provided US financial institutions with unprecedented access to the South Korean market, which was previously restricted. However, restrictions on using foreign Cloud Computing systems for financial services still present regulatory obstacles limiting market access for foreign cloud service providers.
Foreign Exchange Controls Relaxed
South Korea has liberalized its foreign exchange controls in line with OECD standards, allowing foreign firms to remit proceeds accruing from the sale of stocks, principal, interests, and service charges paid to a foreign country. However, restrictions on withdrawing capital remain in place, requiring a stock valuation report issued by a recognized securities company or by Korea Appraisal Board.
US Banks and Local Correspondent Banks: A List
The following US banks have operations in South Korea:
- Bank of America
- Bank of New York Mellon
- Citibank (phasing out retail banking business)
- Wells Fargo Bank
- JP Morgan-Chase Bank
For additional information, visit the U.S. Department of State Investment Climate Statements.