Financial sector calls for deregulation to boost global competitiveness

South Korean financial holding companies are calling for an ease in regulations that will help them boost global competitiveness.

Financial holding companies have continued to grow quantitatively since Korea enacted the Financial Holding Companies Act in 2000 with the aim of creating growth opportunities through the large-scale and diversified operations of financial companies.

As of the first quarter of this year, the combined assets of the top five financial holding companies - KB, Shinhan, Hana, Woori, and Nonghyup - near 3,000 trillion won ($2.26 trillion). In the first half of this year, they achieved a combined net profit of 11 trillion won.

However, compared to their 23 years of quantitative growth, Korean financial holding companies have not received favorable evaluations in terms of global competitiveness.

They blame various regulations that make it difficult to compete.

“The current regulations only require financial holding companies to manage their business as a pure holding company, but there is no need to unnecessarily constrain the operations of financial holding companies,” said an unnamed official from a financial holding company. “If the financial authorities intend to enhance holding company capabilities, they should consider active institutional and regulatory reforms from the perspective of changing the broader financial landscape.”

According to the Korea Federation of Banks on Wednesday, Korea had 13 financial holding companies in 2014, but the number has been reduced to 10 now.

The U.S., on the other hand, has 549 financial holding companies and Japan 34.

One characteristic of Korean financial holding companies is their high dependence on their domestic banking operations. Looking at their revenue structures, Korean financial holding companies derive an average of 57.1 percent of their revenue from domestic banking operations, while in the U.S., it is 45 percent from corporate and investment banking (CIB), 42 percent from retail banking, and 13 percent from asset management.

In Japan, the numbers are 37 percent from CIB, 33 percent from global banking, and 27 percent from retail banking.

The proportion of overseas segments in total holding company revenue is 5.6 percent in Korea, while it is in the 40 percent range for both the U.S. and Japan.

Compared to their U.S. and Japanese counterparts, Korean financial holding companies have less diversified business portfolios and weaker performance in non-banking and overseas businesses.

Currently, the 10 Korean financial holding companies have about 320 subsidiaries. On the other hand, major financial holding companies in the U.S., like JPMorgan Chase & Co. and Goldman Sachs Group Inc., each have over 3,000 subsidiaries.

“It is urgent to establish conditions that allow financial holding companies to expand their business areas through subsidiaries or equity investments,” said an official from another financial holding company.

[Image source: Gettyimagesbank]

The idea is that financial holding companies should be able to invest extensively in non-financial companies.

Currently, the law allows financial holding companies to own stakes in non-affiliated companies of up to 5 percent, while banks, mutual savings banks, and insurance companies are allowed to own up to 15 percent of non-affiliated companies. There are growing calls for financial holding companies to be allowed to increase their ownership to a level similar to that of banks and insurers.

They argue that the non-affiliate ownership limit is a device to distinguish financial holding companies from general holding companies and there is no reason why it should be any stronger for financial holding companies than for banks and insurance.

U.S. financial holding companies can have subsidiaries that engage in a range of financial-related functions, such as brokerage and arranging, or data processing. They can also hold 100 percent of the shares of a venture company through a securities company. In Japan, it is also possible to acquire shares in a venture company through a specialized investment company.

A financial expert at a national research institute suggested that the perspective should be shifted towards including non-financial companies that can support financial operations as investment targets.

“If the government slightly loosens the permissible ownership ratio, it would be possible to diversify our business through strategic partnerships, even if we don’t own it outright,” said an executive in charge of strategy at a financial holding company.

Financial industry insiders also raise the need for an intermediate financial holding company. If financial holding companies can create a global intermediate holding company or a digital intermediate holding company under their control, their sales power will be stronger, they asserted.

The financial sector is also calling for a relaxation of customer information sharing regulations in line with the era of convergence. Currently, based on the Enforcement Decree of the Financial Holding Companies Act, financial holding companies can only provide customer information for credit risk management, internal control, customer analysis, product and service development, and performance management.

As they are prohibited from sharing information for sales purposes, they are unable to provide customized complex products and services that reflect customer demand, which limits the creation of synergies within financial groups. In addition, strict procedures for providing information and obligations to notify customers have led to a culture of avoiding information sharing even among group companies.

The U.S., on the other hand, has virtually no restrictions on information sharing. The European Union (EU) also allows the use of information based on customer consent. Japan has an opt-out rule that allows companies to provide personal information to third parties, but excludes the sharing and utilization of related information from consumers who refuse.