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The government said it plans to revise the Bank Act and the Bank Holding Company Act during the present session of the National Assembly so that businesses will be allowed to own up to a 10 percent stake with voting rights in banks, up from the present 4 percent limit. In the case of private equity funds (PEFs), which pool money from a small group of investors and invest them into stocks and bonds, only those with no more than 10 percent stakes held by non-financial business interests are currently allowed to own shares in banks. But this will change so that PEFs with up to 30 percent stakes owned by non-financial business interests can own shares in banks.
As a result, the gates have been opened allowing businesses to own banks, a controversial issue. With the exception of foreign investors, most shareholders of Korean banks own less than 10 percent, which means there are no major shareholders with a say in management. Now, if businesses acquire even a 10 percent stake in commercial banks, they either become major shareholders or can indirectly own stakes in banks by investing in PEFs. We may not see the immediate rise of Samsung Bank or Hyundai Bank, but major business conglomerates can now have a say in the management of banks.
Allowing businesses to own greater stakes in banks has both positive and negative sides. We grew from a manufacturing economy to one that gave birth to global companies like Samsung Electronics, but our financial industry remains at the level of developing countries. For some time now, people have cited the need to mobilize all the capital resources available domestically to create banks that can compete on a global level.
There will be an immediate effect in the privatization of state-run Korea Development Bank and the nationalized Woori Bank. It will require trillions of won to acquire stakes in those banks, and if major business conglomerates are excluded, then KDB and Woori will end up in the hands of foreign investors, which is what happened during the Asian financial crisis. We will once again see accusations of handing over the country¡¯s assets to foreigners, and at fire-sale prices.
But if the conglomerates are allowed to own stakes in banks, the banks could end up becoming ATMs of the chaebol. If that happens, then financial trouble at the major business conglomerates will end up becoming problems for commercial banks, which in turn could spread to other businesses, leading to a chain reaction of insolvencies. We may see a particular business conglomerate owning 30 to 40 percent stakes in a bank through dispersed investments in several PEFs that buy 10 percent stakes each.
The solution is to allow businesses to own stakes in banks while forming many levels of barriers to prevent corporate insolvencies from spreading to the banking sector, strengthening screening on major business conglomerates seeking to own large shares in banks, and checks on the flow of money to prevent them from using bank ownership as means to bend the rules.
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