Euh Yoon-dae, KB Financial Group's new chairman (JoongAng Daily)
The soon to be appointed new head of KB Financial, has reignited speculation on the government’s plan to create a Korean ‘mega-bank’, at a time when other global leaders are seeking to limit future “too big to fail” scenarios.
Talks of a Korean mega-bank, able to compete with global giants, have been going on for some time now, but received fresh impetus this week with the appointment of Euh Yoon-dae (pictured) as the new chairman of KB Financial Group.
Mr. Euh, a proponent of a Korean mega-bank, stated that he wants KB to be among the world’s top 50 financial institutions as he expressed support for a merger with Woori, which is being privatized by the government.
“Woori Bank is better diversified than Kookmin Bank. I will consider participating in the competition to take over Woori Bank when it is up for sale,” Euh told reporters at a recent press conference.
It has been evident that the Lee Myung-bak government supports the establishment of a mega-bank, with officials saying that it would improve the strength of the Korean financial sector, which they claim is now weak compared to the size of its economy.
KB is the country’s No. 1 commercial lender with 273.8 trillion won ($227.9 billion) in assets last year, but a merger with Woori would raise its assets to above 500 trillion won. This would place it among the world’s top 50 banks, and ninth largest in Asia
Korea's National Competitiveness vs. Korea's Financial Industry Competitiveness (Korea Economic Daily)
However, the establishment of a ‘mega-bank’ has faced much criticism, as it contradicts the global trend toward slimming down banks in the wake of the recent global financial crisis.
Analysts, unions, and international organizations have disputed the need for a giant bank when the concept is being questioned in advanced economies, where the large size of their banks has caused financial problems for governments, which has been forced to bail them out with rescue packages.
The Korean government’s contrarian approach comes at a difficult time, as the U.S. and European governments seek to include the introduction of new rules aimed at tackling “too big to fail” banks as a global agenda at the G20 Summit in Seoul later this year.
Paul Volcker (Business Week)
Currently, the U.S. government is pushing for a legislative proposal, known as the Volcker Rule, which intends to block banks from mergers that would give them more than a 10 percent share of the U.S. banking system, among other things.
As of the end of 2008, the combined assets of the Korea’s top three banks – Kookmin, Shinhan and Woori – accounted for 78.3 percent of the nation’s GDP. That is already far higher than the figure in the United States, where the top players’ assets were worth about 38.8 percent of the country’s GDP.
This has lead critics of the mega-bank initiative warn that mega-banks, if allowed, would create the potential for unusually large systemic risks in the financial industry as well as the national economy should they fail.
Chin Dong-soo, FSC Chairman
Korea’s Financial Services Commission (FSC), the top financial regulator, which is expected to unveil by the end of this year a detailed plan for the sale of the government’s 57 percent stake in Woori, has also questioned the need for a mega-bank, with chairman Chin Dong-soo (pictured) stating,
“If I have to choose between size and competitiveness, the latter must come first..
…take Hyundai and Samsung Electronics as examples. They have not gained competitiveness because they are large, but they have become large because they have competitiveness.”
Added to this, the Organization for Economic Cooperation & Development (OECD) recently voiced a warning against the mega-bank idea.
“Fostering financial institutions that would be large by international standards could create concerns, given recent experience in a number of countries,” the OECD said in a recent report on Korea.
“The efficiency gains from large institutions appear to be small, while the moral hazard associated with ‘too big to fail’ can be severe,” the OECD added.
The market has also questioned the rationale, with investors dumping KB shares this week after Euh announced his plans. It is thought that investors fear that a KB-Woori merger could be complicated since the banks have overlapping operations and consolidation could cause labor problems due to threatened job losses.
This lead to Euh, who is scheduled to take over as KB chairman on July 13, telling an audience of bankers on Friday, that,
“I will work on increasing productivity to raise the value of the company and then business diversification…the mega-bank thing is next after that.”
Euh’s focus on improving KB’s share price appears to reflect a desire to conduct a merger with Woori through a stock swap. The higher the value of KB shares, the less expensive it would be for KB to conduct the merger.
Mega-bank or not, the next twelve months or so are shaping up as the most important in Korea’s financial industry since the Asian financial crisis, as after Woori, the government plans to privatize Korea Development Bank, while the U.S. private equity firm Lone Star’s sale of its 51 percent stake in Korea Exchange Bank, is also still ongoing.
Sources:
Woori deal to face delay? – JoongAng Daily, April 29, 2010
Debate likely to rise on mega-bank issue – JoongAng Daily, June 18, 2010
Mega bank in Korea: Good or bad? – Korea Herald, June 18, 2010
Rising share price is key to KB’s plan for merger – JoongAng Daily, June 19, 2010
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