[Viewpoint] Regret Over the Passage of the Internet-Only Bank Act Amendment in the National Assembly

Jang Deok-jo, Professor at Sogang University School of Law

The amendment to the Internet-Only Bank Act (Special Act on the Establishment and Operation of Internet-Only Banks) passed the National Assembly after much controversy. This bill was essentially the same as the one rejected last March but was approved on the 29th of last month. Since the Internet-Only Bank Act was first enacted and came into effect on January 17, 2019, the debate over this amendment has intensified in just over a year. The main criticism of this amendment is that it relaxed the disqualification criteria in the major shareholder eligibility review for KT, the controlling shareholder of the internet-only bank K-Bank, due to issues related to violations of the Fair Trade Act, leading to accusations that the amendment favors KT. So why is the major shareholder eligibility review in internet banks problematic?

The background of this debate lies in the long-standing principle of 'eunsan bunri (separation of banking and industry).' Eunsan bunri is the fundamental philosophy and policy principle of the Banking Act that prohibits companies engaged in general industries such as manufacturing from owning banks by separating banking from general industry. The first Banking Act enacted in 1950 did not restrict industrial capital ownership of banks, but due to the side effects of industrial capital owning banks, the government nationalized banks in June 1961 by confiscating all bank shares owned by entrepreneurs under the Act on the Confiscation of Illicit Profits. Additionally, a temporary measure law for financial institutions was enacted to limit the voting rights of major bank shareholders, and after several amendments, the current Banking Act restricts industrial capital from owning more than 4% of the total voting shares of a bank.

The potential harms of industrial capital owning banks include monopolies and oligopolies due to economic power concentration, restrictions on credit provision to competitors of industrial capital, preferential credit provision to affiliated companies, and misuse of information held by banks. This results in distorted allocation of financial resources for the benefit of specific industrial capital. More importantly, excessive credit provision by industrial capital to itself threatens the financial soundness of banks, which could ultimately entangle the national real economy and financial economy, putting the national system at risk. Furthermore, it is emphasized that large Korean conglomerates are controlled by individuals or families, and effective monitoring systems are not functioning properly.

However, the Internet-Only Bank Act relaxed this ownership limit. ICT companies are classified as industrial capital, but based on the argument that internet-only banks should be open to companies with creativity and innovation, the ownership limit for industrial capital in internet-only banks was exceptionally raised. Instead of amending the existing Banking Act, a special law?the Internet-Only Bank Act?was created to increase the ownership limit to 34%. To mitigate side effects from this relaxation, a strict eligibility review for major shareholders was implemented. The core idea is to allow ownership up to 34% only to major shareholders who pass eligibility reviews on financial soundness, integrity, honesty, and expertise. In short, while increasing the ownership limit of industrial capital in internet-only banks, the eligibility review for major shareholders was strengthened compared to the Banking Act, aiming to maintain and realize the spirit of the eunsan bunri principle.

Ultimately, since the basic purpose of enacting the Internet-Only Bank Act was to strengthen eligibility reviews to uphold the eunsan bunri principle, the passage of this amendment in the National Assembly is regrettable. Eunsan bunri aims to prevent economic power concentration, and the Fair Trade Act violated by KT is precisely a law designed to prevent the harms of economic power concentration.

Moreover, there are concerns that tailored legislative amendments favoring specific companies like this may recur in the future. Finally, considering that internet-only banks have been operating for about three years, a thorough review should be conducted to assess whether the claimed benefits such as financial service innovation, enhanced bank competitiveness, and fostering of new growth industries have actually materialized.

Jang Deok-jo, Professor, Sogang University School of Law

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