Changing the Banking Oligopoly?..."Need for a 'Megi' Role" vs "It Will Be Difficult"

[Asia Economy Reporters Jehoon Yoo and Aeri Boo] The government has announced a major overhaul of the banking industry's 'oligopoly system,' centered on the five major commercial banks. This comes from the judgment that the banking sector is excessively charging interest by relying on the oligopoly system. The authorities plan to encourage competition in the banking industry through measures such as 'small licenses' and the establishment of a 'fourth internet-only bank.'

Experts generally agree on the need for a 'catfish' to stimulate competition in the domestic banking sector. However, some predict that such regulatory improvements may not easily shake the existing oligopoly system, especially since even the current internet-only banks have yet to firmly establish themselves.

According to the Financial Supervisory Service's Financial Statistics Information System on the 16th, as of the end of 2021, the five major commercial banks (KB Kookmin, Shinhan, Hana, Woori, and NH Nonghyup) held KRW 1,419.0434 trillion in won deposits, accounting for about 73% of the total KRW 1,944.2549 trillion held by all domestic banks. The won loans of the five major banks during the same period amounted to KRW 1,360.9354 trillion, about 66% of the total KRW 2,073.9967 trillion of all domestic banks. This indicates a near-oligopoly system.

The government points to this oligopoly system as the fundamental background behind various controversies surrounding the banking sector amid the recent sharp rise in interest rates. President Yoon Suk-yeol stated at the 13th Emergency Economic and Livelihood Meeting held the previous day, "The harm caused by oligopoly in our banking industry is significant," and ordered the Financial Services Commission and the Financial Supervisory Service to prepare measures to strengthen the related competitive system.

However, both the industry and authorities believe that establishing new banks to promote competition is not easy. A financial authority official said, "The minimum capital requirement for bank licensing is KRW 100 billion, but this is only a minimum condition, and it is realistically difficult to meet all the stringent soundness regulations," adding, "Under current law, non-financial major shareholders are limited to owning 4% of bank shares, making it difficult to attract investors."

Accordingly, the model that the authorities are paying close attention to for resolving the oligopoly system is the 'small license.' The small license concept involves subdividing licensing units to increase financial consumers' choices. For example, creating specialized banks focused on specific sectors such as small business banks. Other options under consideration include licensing a fourth internet-only bank and expanding fintech companies' entry into the financial sector.

To fundamentally restructure the banking sector, the authorities plan to form and operate a 'Banking Sector Management, Business Practices, and System Improvement Task Force (TF)' within this month, involving the Financial Services Commission, Financial Supervisory Service, banking sector, academia, legal experts, and consumer specialists. A senior official from the Financial Supervisory Service explained, "We have started discussions on various measures aimed at easing the oligopoly of the five major banks," adding, "We will consider various options mentioned in the market, such as small licenses, as choices for discussion."

Experts are positive about introducing a 'catfish' to promote competition. For instance, they explain that the UK's introduction of challenger banks was partly to break the oligopoly that deepened in the banking sector after the 2008 global financial crisis.

Baehyun Ki, CEO of Wealth Guide and former head of Hana Financial Research Institute, said, "The UK has nine large banks under the control of the Competition and Markets Authority (CMA), about twice as many as Korea, but to prevent their oligopoly, the challenger bank system was introduced," adding, "Establishing new banks is physically difficult and there are many contentious issues such as the separation of banking and industry, so inducing competition through small licenses can be one way to resolve the oligopoly."

However, many remain skeptical about whether such a system can dissolve the oligopoly. A financial sector official noted, "The current oligopoly system was formed through national consensus following the foreign exchange crisis, and all related regulatory systems are designed to support it," emphasizing, "It will not be easy to dismantle."

An official from a foreign consulting firm specializing in finance said, "As customers age and accumulate wealth, they seek comprehensive asset management from commercial banks," adding, "Internet banks, which only handle simple products, initially raised expectations as 'catfish,' but their growth limitations stem from this."

There is also an argument that it will be difficult to counter the trend of oligopolization in the international financial system following the financial crisis. Although about 20 challenger banks operate in the UK, only a few have secured profitability.

Lee Taekyu, senior researcher at the Korea Economic Research Institute, stated, "Since the 2008 financial crisis, regulatory barriers related to banking have tightened worldwide, which has encouraged oligopoly," adding, "It seems difficult for latecomers to achieve profitability. The reason European challenger banks focus on niche markets is also due to this."

This content was produced with the assistance of AI translation services.