Will dismantling oligopoly result in successful bank industry reform?

Experts advise gov't to focus on overhauling corporate governance

By Yi Whan-woo

The government's drive to dismantle Korea's oligopolistic banking industry structure is raising questions over the consequences of such reforms in the face of increasing turmoil in global financial markets this month.

Financial authorities want to dismantle the market dominance held by a handful of large banks by bringing in more competition, in a bid to prevent mainstream players from reaping excessive profits while being lax on serving customers responsibly.

Under the circumstances, the global banking turmoil sparked by the sudden collapses of Silicon Valley Bank (SVB) in the United States and Credit Suisse in Europe hint that the government's anti-oligopoly campaign can rather backfire or disrupt the positive influence of large banks.

Experts said the bankruptcy of startup-focused SVB, March 10, displayed risks associated with creating smaller yet specialized lenders ― a possible solution brainstormed by the administration of President Yoon Suk Yeol to diversify the banking sector.

In the case of Credit Suisse, its longtime rival UBS announced plans on March 19 to take over the beleaguered lender to avoid chaos in the Swiss banking system and a larger global financial crisis.

The UBS rescue plan is seen as a positive influence that only a mega-sized financial institution, as opposed to small lenders, can bring to safeguard the market, according to experts.

"After all, it should be made clear that the Yoon administration's banking reform is wrong from the beginning as it addresses oligopoly as if it was the sole reason behind banks keeping windfall profits for themselves and failing to ease the financial burden of borrowers," said Jung Ho-chul, a program coordinator at the Financial Reform Committee of Citizens' Coalition for Economic Justice, a Seoul-based activist group.

He referred to a record 40 trillion won ($31.2 billion) in interest income earned by the country's four largest banking groups ― Shinhan, KB, Hana and Woori ― in 2022 in the midst of a steep rate hike delivered by the Bank of Korea (BOK). The big four lenders have been accused of keeping loan rates high and turning a blind eye to customers who struggle with repayments.

The Yoon administration believes that lowering barriers and bringing in more companies to open new banks will prompt mainstream lenders to lower loan rates and also improve other related services for customers.

Jung said he disagrees with the government's approach, arguing, "Even smaller banks have been raising lending rates to reap as much gains as it can following the BOK's rate hike."

A senior member of another activist group also warned of the negative impact of a crackdown on banking oligopoly, especially at a time of economic unrest.

"The oligopolistic system reflects the idea of the survival of the fittest dating back from the 1997-98 Asian financial crisis when numerous banks were in operation, but were merged later," said Kang Hyeong-ku at the Korea Finance Consumer Federation.

He noted that the SVB and Credit Suisse fiascos "demonstrate the risk of diversification in the banking industry" when the global economy remains fragile and market volatility is high.

Kang also pointed out that the housing bubble in Korea, sluggish stock market and other risks faced by the large banks will pose bigger challenges for smaller lenders that the government wants to create.

"It certainly is not the right time to break up the oligopoly, but rather keep such a system," Kang said.

The Korean Financial Industry Union, a labor group representing workers at private and public banks nationwide, said in a statement that the oligopoly was "built with the support of the governments since the 1997-98 Asian financial crisis to enhance competitiveness on the international stage."

"The incumbent government should think over whether its reform can propel the banking industry to move forward or vice versa," the union said.

For successful banking reforms, experts urged the Yoon administration to materialize plans to overhaul the governance structure and customer-oriented services of banks.

The overhaul of governance structure includes enhanced monitoring of management by outside directors.

According to Jung at the Citizens' Coalition for Economic Justice, outside directors should be picked from those "who have little connection with the management" in order to increase transparency.

He argued that outside directors usually include retired financial bureaucrats who "tend to lean toward management."

He said the bank's campaigns on environmental, social, and corporate governance (ESG) should be improved to "directly meet the customers' need rather than showing off."

"For example, borrowers in dire economic circumstances may find it more helpful to have their loan interest rates reduced compared to receiving briquettes as a part of charity project," he said.

Kang at the Korea Finance Consumer Federation said the government is moving in the right direction by seeking to adopt "say on pay" and "clawback" practices to monitor banks' management.

"Say on pay" refers to shareholders' right to vote on an appropriate amount of salaries and incentives to be received by executives based on their performance.

"Clawback" refers to a contract under which executives are asked to return their bonuses as a penalty if they inflict financial losses on their companies.