South Korea allows new bank entrants for first time in 30 years

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South Korea will allow new entrants to the banking sector for the first time in 30 years to spur competition after the government criticised the big bonuses paid to banking employees as interest rates rise.

President Yoon Suk Yeol earlier this year accused the country’s banks of enjoying a “feast” of bonuses, adding that the sector made “easy” profits at the public’s expense through a rate gap between deposits and loans.

The government will allow more online banks, permit commercial banking licenses for existing financial companies and ease the loan-to-deposit rules for local branches of foreign banks, the Financial Services Commission said on Wednesday. The measures come into effect immediately.

“We will boost competition in various aspects as our banking industry has made easy money amid a lack of competition,” said FSC governor Kim Joo-hyun. “The public perception is that the industry has not made enough effort to become global financial players suitable for the country’s economic standing.”

South Korea’s banking sector has been dominated by five lenders. The country’s banking sub-index fell 0.93 per cent on Wednesday afternoon on expectations of higher competition.

Daegu Bank, a regional banking unit of DGB Financial Group, is expected to become the first beneficiary of the new rules. It plans to apply for a licence to become a nationwide lender, according to the FSC.

“The banking sector’s oligopoly has caused significant damage,” Yoon told a meeting of economic ministers in February, calling on financial regulators to devise measures to force the country’s banks to ease the cost of living pressure.

“The public is feeling immense pressure due to banks’ high interest rates,” Yoon told officials at a separate meeting this year.

The Bank of Korea raised its benchmark interest rate from 1 per cent to 3.25 per cent over the course of last year. The base rate is presently 3.5 per cent, with analysts expecting delinquency rates to increase in the second half of this year as the country’s economy slows.

The combined net profits of South Korea’s five largest financial groups — Shinhan Bank, Kookmin Bank, Hana Bank, Woori Bank and NongHyup Bank — was Won12.7tn ($9.8bn) in 2022, up about 18 per cent from the previous year.

Critics said the latest measures were not enough to increase competition in the sector.

“Blaming banks for generous bonus payments made legally with handsome profits is not reasonable,” said Hwang Sei-woon, a researcher at the Korea Capital Market Institute. “Too much verbal intervention like this only increases uncertainties in the business environment of the sector.”

He added that new entrants would find it hard to become serious competitors to existing players.

“It is difficult to shake the current market dynamics without easing regulations on the business areas divided between banks, brokerages and asset managers,” said Hwang.

In South Korea, chaebol — family-controlled conglomerates such as Samsung and Hyundai — are banned from entering the banking sector on fears they could use their banking affiliates to illegally fund business expansion or enrich their major shareholders.

South Korean banks are not allowed to engage in investment banking and asset management, making them reliant on interest income.