Learning from the SVB Crisis... Authorities Must Be Cautious in Introducing Challenger Banks

People Power Party's 'Digital Asset Special Committee Min-Dang-Jeong Meeting'
If asset diversification fails like Silicon Valley Bank,
management difficulties arise when specialized area issues occur

Yoon Chang-hyun, a member of the People Power Party, is speaking at the Digital Asset Special Committee's meeting between the ruling and opposition parties held on the 24th at the National Assembly Members' Office Building, under the theme "SVB Incident & Crypto Winter, Is Another Financially Driven Economic Crisis Coming?" Photo by Kim Hyun-min kimhyun81@

Following the bankruptcy of Silicon Valley Bank, which primarily operated by focusing on startups in the California region, limitations in risk management of specialized banks have become apparent. As such, there is a claim that South Korea's financial authorities should exercise caution in introducing challenger banks, which are currently under discussion.

On the 24th, at the National Assembly Members' Office Building, during the Digital Asset Special Committee's ruling and opposition party meeting titled "SVB Incident & Crypto Winter, Is Another Financially Triggered Economic Crisis Coming?" (hosted by the People Power Party Policy Committee and National Assembly member Yoon Chang-hyun), Seo Byung-ho, head of the Financial Innovation Research Office at the Korea Institute of Finance, who led the comprehensive discussion, explained the background: "In the U.S., due to the impact of the 'crypto winter,' after Silvergate Bank, which handled cryptocurrency deposits, custody, remittances, and Bitcoin-backed loans, went bankrupt, Signature Bank, which dealt with Bitcoin-backed loans, and Silicon Valley Bank, which provided total services to startups, were also closed."

He added, "Although full deposit protection was declared afterward to prevent a domino collapse, the continued concentration of deposits in large banks has led to a situation where efforts are focused on rescuing First Republic Bank, which, like Silicon Valley Bank, specialized in startups." He warned that financial authorities should be cautious about hastily opening the gates to entry into the banking industry.

Taking this incident as an opportunity, Seo pointed out that the introduction of the 'challenger bank' model, currently being reviewed by the Financial Services Commission's 'Banking Sector Management, Business Practices, and System Improvement Task Force (TF)' as a way to break the oligopoly structure of existing commercial banks, should also be approached carefully. Challenger banks were created in the UK and are banks specializing only in niche services such as small and medium-sized enterprise loans or remittance and currency exchange with relatively small capital.

Seo warned, "In the process of discussing structural improvements in the banking industry, the introduction of 'challenger banks' that focus on specific industries or the establishment of regional banks based on certain areas is being considered. However, if the asset portfolio is not diversified, management difficulties may arise when problems occur in the specialized areas."

There was a similar case during the foreign exchange crisis. While commercial banks were also liquidated, specialized banks such as Daedong Bank, which exclusively served small and medium-sized enterprises in the Daegu region; Long-term Credit Bank, specialized in corporate finance; Peace Bank, focused on worker services; and regionally distinctive banks like Dongnam, Gyeonggi, Chungcheong, Gangwon, and Chungbuk Banks were all liquidated in large numbers.

Seo stated, "While the intention to strengthen competition in the banking sector is understandable, in light of the red oceanization of the banking industry, overbanking, and risk management issues of specialized banks require in-depth discussion. Considering the uncertainty in the financial market and the need for existing banks to bolster capital, it is necessary to postpone discussions on the introduction for the time being."

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