Daegu Bank to Convert to Commercial Bank Possibly Within This Year... Oligopoly of Five Major Banks Faces 'Crack' After 31 Years

Banking Industry Shifts to 'Competitive Market' System
Active Approval for Existing Financial Firms' Bank Conversion and New Licenses

Financial Services Commission Chairman Kim Ju-hyun is giving an opening remark at the Bank Holding Company Chairmen Meeting held at the Bankers' Hall in Jung-gu, Seoul on the 5th. Photo by Yoon Dong-joo doso7@

Regional bank DGB Daegu Bank is set to convert into a commercial bank as early as this year. Along with this, the conversion of existing financial companies into banks will be actively permitted, and additional licenses for commercial, regional, and internet-only banks will be pursued. This move comes as financial authorities have decided to take proactive steps to enable the banking sector, which has formed an oligopoly centered around the five major banks, to engage in effective competition in terms of pricing and services.

On the 5th, Financial Services Commission Chairman Kim Ju-hyun held a meeting with bank holding company chairpersons at the Bankers' Hall in Jung-gu, Seoul, where he announced the "Banking Sector Management, Business Practices, and System Improvement Plan" containing these details. Attending the meeting were Chairman Kim, Financial Supervisory Service Governor Lee Bok-hyun, chairpersons of four bank holding companies (KB, Shinhan, Hana, Woori), and the vice president of NH Nonghyup.

This system improvement plan was based on discussions held over 15 sessions of the banking sector system improvement task force and working group meetings, which included authorities, the Bank of Korea, financial sector representatives, private experts, and research institutions since February.

Chairman Kim explained the background, saying, "The core of this task force work is to introduce a fair and effective competitive system," adding, "Underlying this effort is the public perception that the banking industry, based on its characteristics as a competition-restrictive industry, has been able to easily generate profits but lacks sufficient efforts to transform into a global financial company befitting our economy's status."

Active Permission for 'New Players'... Daegu Bank to Become a Commercial Bank

Accordingly, financial authorities have decided to expand the entry of 'new players' to promote competition in the banking sector. First, they will actively allow existing financial companies to convert into banks. This is based on the judgment that if regional and savings banks experienced in banking convert into commercial or regional banks, they can quickly promote stable and effective competition. The Financial Services Commission plans to review whether applicants meet the requirements and decide on approval accordingly.

Among regional banks, Daegu Bank is currently considering conversion into a commercial bank. The last commercial bank license was granted in 1992 to Peace Bank (which merged into Woori Bank). Authorities expect that if Daegu Bank successfully converts into a commercial bank, it will be able to compete in loans and deposits with commercial banks in the metropolitan, Chungcheong, and Gangwon regions where regional banks are absent. Vice Chairman Kim said, "If things proceed quickly, I think it could be possible within this year (for Daegu Bank to convert into a commercial bank)."

Authorities will also transform the banking industry into a 'contestable market' where competitors can enter at any time. Previously, the structure was such that after authorities announced licensing policies, new players would apply and undergo review. Going forward, licenses for commercial, regional, and internet-only banks will be granted after screening operators with sufficient soundness and business plans.

Chairman Kim emphasized, "If the conversion of regional banks into commercial banks occurs, it will be the first new entry into commercial banking in over 30 years, and the emergence of commercial banks headquartered in regional areas could bring meaningful changes to the existing competitive landscape. We will actively promote new licenses if applicants have sufficient capital and feasible business plans."

Authorities also plan to promote competition inside and outside the banking sector to expand real price and service competition. To help savings banks grow in size and secure competitiveness in deposits and loans, the scope of mergers and acquisitions (M&A) among savings banks will be expanded. For restructuring purposes or non-metropolitan savings banks, acquisitions without regional restrictions will be allowed up to four companies, and mergers will be permitted up to four business regions.

First New Commercial Bank License in 31 Years... Mixed Views Inside and Outside Financial Sector

However, many in the industry predict that this plan by authorities will find it difficult to break the oligopoly of the five major banks (KB Kookmin, Shinhan, Hana, Woori, NH Nonghyup). There is generally no major obstacle to Daegu Bank's conversion into a commercial bank. As of the end of last year, Daegu Bank's capital stood at about 680 billion KRW, meeting the minimum capital requirement of 100 billion KRW under the Banking Act. The major shareholders of its parent company, DGB Financial Group, include the National Pension Service and OK Savings Bank, which makes it relatively free from the financial-industrial separation regulation.

However, success is uncertain from the perspective of economies of scale. For example, KB Kookmin Bank, the industry leader, has equity capital of 2 trillion KRW and total assets of 500 trillion KRW. Daegu Bank's equity capital is 680 billion KRW, and total assets are about 51 trillion KRW, which is even less than SC First Bank, the smallest commercial bank.

A commercial bank official said, "Even if Daegu Bank converts into a commercial bank, it will be difficult to compete with large banks with asset sizes of 400 to 500 trillion KRW, so significant capital expansion will be necessary. Unless BNK and JB Financial also convert, the conversion of Daegu Bank alone, the smallest regional bank at the holding company level, is unlikely to have much effect."

Evaluations of new licenses for commercial, regional, and internet-only banks, as well as deregulation of M&A to strengthen savings banks' competitiveness, are similar. Under current law, new bank licenses require minimum capital of 25 billion KRW (internet-only banks) to 100 billion KRW (commercial banks), but this is only a minimum, and the financial-industrial separation regulation remains a limitation. Another financial sector official pointed out, "The intention is to help savings banks grow to strengthen competitiveness, but similar discussions have occurred before and subsided after the 2011 savings bank crisis. Existing players have little incentive to apply for conversion, and it seems unlikely that new players will enter the market."

Measures such as introducing specialized banks, which the task force has discussed from the beginning to break the banking oligopoly, and expanding payment services by non-bank sectors, have also been postponed as "issues for future discussion." This is due to concerns that deregulation could increase financial market instability, especially following the March collapse of the U.S. Silicon Valley Bank (SVB). Authorities maintain that licenses for internet-only banks and innovative financial services similar to specialized banks are already underway.

Baek Hyun-gi, CEO of Wealth Guide (former head of Hana Financial Research Institute), added, "The discussion has regressed due to the SVB incident and other situational logic, but even the UK, which has less oligopoly than Korea, has attempted to change the oligopoly structure through 'challenger banks,' which should be remembered."

Professor Kim Sang-bong of Hansung University’s Department of Economics stated, "The reason banks enjoyed excess profits during the recent rapid interest rate hikes was not due to interest rates but because the absolute loan volume increased. In fact, the banking sector's net interest margin (NIM) has fluctuated but remained around 1% without significant change," adding, "This is a result of diagnoses being detached from the essence."

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