CitiGroup's $2.7 billion takeover of a once-troubled bank should be a milestone South Korean policymakers want to celebrate. The KorAm Bank acquisition, the largest-ever foreign investment in the country, signals a vote of confidence in the Korean economy and underscores the turnaround of a banking industry that all but collapsed following the 1997-98 Asian Crisis. To spur a recovery from the crisis, Korean policymakers actively courted leading global banks, figuring that investments by world-class institutions would strengthen Korea's battered financial sector.
Citigroup will finalize the merger of its Korea operation with KorAm's on Nov. 1. But between the announcement of Citigroup's deal in February and its consummation, something has changed in the Korean mood. The debate in the country has shifted from how to attract more foreign capital to the banks to how to limit foreign influence. Newspapers, politicians, and even some bureaucrats are now blaming the forces of foreign capital (weigukjabon, in Korean), for focusing on affluent retail customers instead of helping the government achieve its economic objectives by lending more to business. In fact, in the past two years, banks controlled by weigukjabon -- Korea First Bank, Korea Exchange Bank, and Kookmin Bank -- have balked at government attempts to arm-twist all the banks into bailing out embattled companies like LG Card, SK Global, and Hynix Semiconductor.
In other words, these banks are behaving like real banks, with a focus on profits, not mandated bailouts. That attitude wasn't expected when Seoul opened up the sector, and it's not appreciated. "The mandarins appear determined to hold on to the bridle of state control over the banking system," worries Hongik University economist Jun Sung In.
The government defends its position by noting that it willingly privatized state-controlled banks, and that everyone should take an interest in developing industry. Now some reformers fear this idea is inspiring not just editorials but action. On Sept. 10, the National Assembly passed a law that permits local equity funds to buy out banks. Sounds innocent -- no such funds existed before, so a law was needed to authorize them. But reformers think the government wants to give the chaebol -- Korea's giant conglomerates -- a chance to bankroll these funds. That would be the easiest way to raise the money needed to stop more foreign takeovers. The law was passed just as the government prepares to privatize a large bank, Woori Bank, in the spring. The government notes that the law also blocks any chaebol from acquiring outright control of a bank, but the funds could still prove powerful enough to counter foreign bids.
Legislation is one sign of the change in mood. Disciplinary action is another. On Sept. 10 regulators barred Kim Jung Tae, president of Kookmin Bank (KB), from seeking a second term or an executive post at any of Korea's banks for three years. Regulators said Kookmin used questionable accounting to avoid a $270 million tax bill; Kookmin defends the technique. Bankers privately say that even if Kookmin was too aggressive, the penalty is too severe. Kim, it turns out, refused to play a big role in the bailout of LG Card. "The authorities obviously wanted to imbue bankers' minds with the fear that they could be fired unless they toe the official line," says a foreign banker.
Meanwhile, government watchdogs seem to be moving beyond their original purpose. The Financial Supervisory Commission was set up to make sure the banks did not take excessive risks. But recently, Yoon Jeung Hyun, the FSC chairman, has likened banks to extortionists for making rich profits while refusing to help crippled small and midsize companies. Never mind that Korean banks' average return on assets is only about half the U.S. average. The point is that banks avoid undue risk by lending where it makes sense, not where they are directed. Again, there's an implicit antiforeign message. It's the foreign-controlled banks that balk most at mandated lending.
Luckily for Korea, no one can undo the Citigroup-KorAm deal. KorAm CEO Ha Yung Ku is confident the Citigroup takeover will turn his bank into Korea's finest financial institution, with global capabilities. The Koreans could do with a reminder of how beneficial an open financial sector can be.
By Moon Ihlwan