Measures needed to prevent side effects of deregulation for internet-only banks
The government seems to be shifting the focus of its economic policy from income-led to innovation-driven growth.
Innovation-driven growth is a strategy to grow the economy through investments in new technology and venture companies and the promotio business startups. At its core is the elimination of vested interests and outdated regulations that corrode productivity and innovation. Changeover to the strategy is desirable.
President Moon Jae-in Tuesday urged the easing of regulations against internet-only banks and emphasized regulation reform, showing signs of such change.
Deregulation for internet-only banks is likely to come true sooner or later through legislation. Floor leaders of the ruling Democratic Party of Korea, the major opposition Liberty Korea Party and minor opposition Bareunmirae Party agreed Tuesday to enact the exemption of internet-only banks from regulations limiting a nonfinancial firm's ownership of a financial firm when they hold an extraordinary session this month.
Under the regulation on the separation of financial and industrial capital, a nonfinancial company is banned from owning more than 4 percent of a financial company. The floor leaders made a provisional deal to raise it to 34 percent for internet-only banks.
Its object is to preclude a nonfinancial company from abusing a bank to its advantage as the largest shareholder, causing losses to bank customers.
Controversy over the regulation has persisted since internet-only banks were launched last year. They argued they need be recapitalized to further develop, but that they could not due to the regulation. If the regulation is eased, they said they will be able to develop new banking services, lower loan interest rates and create jobs.
The government believes that existing banks make easy money simply by spreading net interest margin between loan and saving so it needs deregulate internet-only banks to prod existing banks to reform their services. This view is reasonable.
The government's move toward innovation-driven growth is much to be welcomed. Recently Moon emphasized innovation-led growth and related deregulation several times. Both ruling and opposition parties responded positively and quickly.
However, opposite views need be fully considered. If a nonfinancial company holding a controlling stake in an internet-only bank is driven into a management crisis, it would be tempted to use the bank as its personal safe. There are concerns that deregulation of the separation of financial and industrial capital will further centralize economic power around large companies.
If the regulation is eased only for internet-only banks while existing banks are left as they are, equity could be questioned. By all means, internet-only banks are banks. If problems happen there, customers will suffer losses as with existing banks. Existing banks will demand equal treatment. The authorities should be able to give cogent reasons for easing the regulation only for internet-only banks.
Given that internet-only banks use a technology-intensive infrastructure based on financial technology, their effect on job creation is uncertain. Existing banks also provide mobile services. It is not easy for internet-only banks to develop services which can set themselves apart from existing banks.
If net interest margin is a problem, it is more effective to address it from the perspective of financial supervision rather than from that of fintech.
Of course, the government tries to ease regulations for internet-only banks because it believes that deregulation will have more positive effects than negative ones. Both ruling and opposition parties seem to feel the same way. When discussing related issues prior to legislation, they must work out systems to minimize side effects, which can happen when financial and industrial capital are not thoroughly separated to protect bank customers.
Innovation-driven growth and deregulation are the right direction to revitalize the Korean economy which sees warning lights come on. In this sense, the push for deregulation of internet-only banks is hopeful. It should serve as the beginning of regulation reform in other fields.
The government must open the door of innovation wide and push deregulation, but at the same time it should work out complementary measures as well.
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