’Banks need to prepare for FTA’
Korea Herald | 2006.07.17
’Banks need to prepare for FTA’
KIF says free trade agreement with U.S. could increase systemic risk
By Kim Jung-min
A free trade agreement with the United States could have a profound impact on the regulatory environment of the banking sector and reshape the industry’s landscape, a think tank said yesterday.
Gu Bon-sung, a research fellow at the Korea Institute of Finance said in a report that once an FTA is concluded with the United States, Korea will face increasing pressures to scrap various regulations on global financial institutions operating in Korea.
"Any drastic change in regulatory policy could increase the possibility of an industry-wide systemic problem or market instability," Gu said.
To insulate the banking market from any risk arising from increasing offshore transactions, it is imperative to secure legal grounds to bolster the financial soundness of commercial lenders, he said.
To avert a possible systemic risk in the banking sector, it is important for the local regulator to press commercial lenders to increase their capital adequacy ratios or set aside more provisions against potential distressed loans, he added.
As the nation’s banking sector is heavily regulated compared to the nonbanking sectors, the impact of an FTA with the United States on the industry could be greater than expected, he said.
Gu also noted that current banking regulations highlight the public role of local commercial lenders. Seen from the perspective of global financial institutions, this emphasis on the public role of banks could create a number of obstacles to their localization strategies.
Entrance barriers in the banking business are relatively high in Korea as global financial institutions need to meet capital requirements to open a branch here. Lenders are also required to extend a certain portion of their loans to smaller enterprises. Such regulations make it difficult for foreign banks to expand their business in Korea and increase their business profitability, many foreign banking experts have pointed out.
While ensuring that the deregulation process is promoted at a measured pace, financial regulators should take various steps to entice long-term global investments to the local market, Gu said. Setting up a corporation or acquiring local financial institutions, for example, is regarded as more desirable than increasing the number of business operations here, Gu said.
On Wednesday, Kim Jong-hoon, chief Korean negotiator at the free trade talks with the United States said that the two sides agreed that all new financial services entering each other’s markets should get approval from the respective financial authorities.
In cross-border financial services, the negotiation will be largely restricted to the global retail banking rather than corporate banking or derivatives trading services, Kim said.
One of the key issues in the FTA negotiations on the financial sectors is whether to allow cross-border financial services. Korea is reluctant to open up the new financial services market, considering that they would make only a limited contribution to creating employment and bringing in new financial expertise to the local industry, industry analysts say.
