FSC to Launch Financial Reform

Chmn. Chin: Privatization of Woori Financial Group and Korea Development Bank to depend on market conditions

Chairman Chin Dong-soo of the Financial Services Commission (FSC) signaled the move for the restructuring of the financial industry in Korea including the privatization of Woori Financial Group following the June 2 local elections.
The former high-ranking official of the Ministry of Strategy and Finance said all banks, small and large, should reform themselves as soon as possible as there is not much time left, pointing out risk management as one of the imminent problems that the banks are faced with. Another problem is the “herd” tendency, meaning that banks tend to run the same kind of banking business if another bank does well in that business. He also pointed out that banks show little difference from one another, whether provincial or in the capital area.
The former head of the Korea Export and Import Bank stressed that the most urgent matter is risk management to reduce the level of loan loss provisions by banks, which need to be more systematic and run independently from other banking operations. CEOs should lead the creation of a sound banking culture, as well-organized risk management systems can be borrowed easily from other banks, but the key to managing them well depends on corporate culture.
Bank CEOs should have long-term outlooks, but banking conditions don’t allow it in terms of political, societal and economic situations in the country. They are not able to remain in their positions as CEOs for a long time, which is a problem that the banking industry should solve, Chin said.
“There is no one model to follow and each bank should have its own model,” Chin said. Each bank should set up its own model that will ensure continuous profits in the years to come. It could be a foreign model or taken from a domestic bank such as Kookmin Bank, a retail bank since its inception that has grown to be a supreme bank in the retailing banking sector.
Since the 1998 financial crisis, many banks turned to retail banking to emulate Kookmin Bank, but not for long, as the crisis subsided early and business lenders returned to their normal operations.
He said no banking regulations can stop banks from launching overseas operations, but the FSC will stop their overseas operations from damaging domestic operations with excessive losses abroad. Its up to each bank to make sure it will not sustain losses from overseas operations, Chin said.
On the FSC’s plans for the privatization of Woori Financial Group and the Korea Development Bank, he said they would depend on how the market responds to the moves, meaning competition. “We cannot control the financial market conditions,” Chin said. As he sees it, there will be a concrete plan set up for the move sometime this month including its process and means.
As for the KDB, its privatization will take place next year, he said.
A key in the move is the recovery of government funds in those organizations to the maximum extent possible. He said the FSC requested the Public Fund Recovery Committee to study all aspects connected with the move including M&As and the sale of each affiliate separate from the holding company. They have a general outline of the policy and will be able to release details as soon as they emerge.
Despite the EU-IMF rescue package for Greece, financial markets faltered amid fears that the southern European debt crisis could spread. Stock markets in the United States and Europe fell, and the KOSPI index fell 2 percent in May as well. The value of the U.S. dollar and the yen against the Korean won surged.
However, southern Europe’s debt crisis is expected to have only a limited impact on the Korean financial market, the FSC said in a recent statement. The statement noted that Korea’s exposure to the region is insignificant. As of the end of 2009, Korean financial companies’ exposure to southern European countries ― Greece, Spain, Italy and Portugal ― is $640 million, just 1.2 percent of the total external exposure. The total borrowings from those countries are only $390 million, the FSC said.
As market concerns over southern Europe’s debt crisis and its contagion to Europe as a whole might persist for a while, the FSC plans to strengthen its monitoring of financial markets and European capital flows. To this end, the FSC will closely monitor capital inflows and outflows and thoroughly examine domestic banks’ foreign liquidity soundness and external borrowing conditions. nw

Chairman Chin Dong-soo of Financial Service Commission.