3rd Market Economy Colloquium: The Real Reason We Need to Ease Separation of Banking and Commerce Regulations

3rd Market Economy Colloquium

Date and Time: 11:00 a.m., February 21, 2025, Venue: Yeollim Hall

Topic: The Real Reasons Why Easing Separation of Banking and Commerce Regulations Is Necessary

Presenter: Jaewook Ahn, Chairman of the Center for Free Enterprise (CFE) (Professor Emeritus, Department of Economics, Kyung Hee University)

Discussants: Hyeokcheol Kwon, Director of the Free Market Institute; Youngyong Kim, Professor Emeritus, Chonnam National University; Yiseok Kim, Director of the Market Economy System Institute; Haengbeom Kim, Professor Emeritus, Pusan National University; Sung-no Choi, President of the Center for Free Enterprise (CFE)

The Real Reasons Why Easing Separation of Banking and Commerce Regulations Is Necessary

Jaewook Ahn, Professor Emeritus, Department of Economics, Kyung Hee University

Recently, regulations on the separation of banking and commerce (the separation of finance and industrial capital) have emerged as a major issue. This is because the government’s shareholder return policy of treasury share cancellation, which is being promoted as part of its “Value-up” initiative to enhance corporate value, is coming into conflict with separation of banking and commerce regulations.

One such regulation, the Act on the Structural Improvement of the Financial Industry (Article 24), restricts financial companies from holding more than 20% of the shares of non-financial affiliates and requires approval from the Financial Services Commission each time their shareholding exceeds 5%, 10%, or 15%.

Recently, Samsung Electronics announced a plan to buy back and cancel treasury shares worth 3 trillion won. If the plan proceeds as intended, Samsung Life Insurance and Samsung Fire & Marine Insurance’s combined shareholding in Samsung Electronics would reach 10.08%, putting them in violation of the regulation.

To address this, Samsung Life Insurance and Samsung Fire & Marine Insurance decided to sell Samsung Electronics shares worth about 300 billion won, and as a result, Samsung Electronics’ stock price is expected to decline.

This situation shows that separation of banking and commerce regulations are becoming an obstacle to the government’s Value-up policy, thereby raising the need to ease such regulations.

However, it is not desirable to argue for easing separation of banking and commerce regulations simply because they conflict with the government’s shareholder return policy.

Treasury share cancellation can artificially inflate earnings per share by reducing the number of shares outstanding. But it can also divert resources away from productive investment such as business expansion, innovation, or employment, thereby hindering a company’s long-term growth.

Therefore, easing separation of banking and commerce regulations should focus not on shareholder return policies, but on the development of the financial industry.

At present, Korea’s separation of banking and commerce regime is enforced through a range of regulations, including the Act on the Structural Improvement of the Financial Industry, the Banking Act, the Financial Holding Companies Act, and the Insurance Business Act.

The Banking Act limits industrial capital from owning more than 4% of a bank’s shares, while the Financial Holding Companies Act limits the shareholding of the largest shareholder in a bank holding company to 10% (15% for regional bank holding companies).

In addition, the Insurance Business Act stipulates that insurers may not hold more than 15% of another company’s shares.

The rationale for separation of banking and commerce regulations originated from concerns that if large industrial capital were allowed to own financial institutions, they could become private vaults for chaebol, leading to reckless investment and business expansion.

However, due to strict monitoring and control through financial supervision and fair trade laws, such concerns have lost much of their persuasiveness today.

Even so, those who argue that separation of banking and commerce should be maintained continue to cling to the proposition that the separation of financial capital and industrial capital is a “principle.”

But separation of banking and commerce is not a “principle.”

A true principle must be capable of universal application in all cases. The fact that separation of banking and commerce is applied differently from country to country shows that it is difficult to regard it as a principle.

In reality, there are not many countries that strictly distinguish between finance and industry.

In the United Kingdom, various investment funds and asset management companies hold substantial stakes in industrial firms, while in Germany, the integration of financial capital and industrial capital is even more pronounced.

German banks operate as universal banks, providing a wide range of financial services including both commercial and investment banking.

Meanwhile, the automobile company Volkswagen provides financing for vehicle operations through its own financial services division, Volkswagen Financial Services.

Japan as well has deeply rooted integration between financial capital and industrial capital, with its keiretsu system forming interconnected corporate networks among banks, manufacturers, and trading companies.

Toyota, an automobile manufacturer, also operates its own financial services division, Toyota Financial Services, which provides financing to support vehicle operations.

The country that enforces separation of banking and commerce most strictly is the United States. Yet even in the United States, individuals have been allowed to engage in both finance and general industry.

In the 19th century, Moses Taylor ran a trading company and an iron ore company while serving as the largest shareholder and CEO of National City Bank, the predecessor to “Citibank.”

Sam Walton, who was both the largest shareholder and CEO of Walmart, also participated in management as a major shareholder of “Northwest Arkansas Bancshares.”

In addition, GE Capital, a major financial services arm of General Electric, is a good example of the integration of industry and finance. GE Capital provided various financial services, including commercial lending and leasing, to support GE’s operations.

Berkshire Hathaway, led by Warren Buffett, owns numerous companies across a wide range of industries, including insurance and industrial manufacturing, mainly through investment and holding companies.

Korea’s separation of banking and commerce regulations are far stricter than those of other countries.

In addition to the regulations mentioned earlier, the Fair Trade Act provides that a general holding company may not own a financial company as a subsidiary, and a financial holding company may not own a general company as a subsidiary.

In addition, under the Financial Holding Companies Act, a financial holding company may acquire up to 5% of the voting shares of a non-financial company, while banks and insurers may acquire only up to 15%.

These stringent separation of banking and commerce regulations block competition between industrial capital and financial capital, thereby hindering innovation and development in the financial industry.

Recently, some regulations were eased due to the impact of fintech, allowing information and communications technology (ICT) companies to own up to 34% of the shares of internet-only banks, but this has brought only limited change to the financial industry.

It is still insufficient to bring about groundbreaking innovation and transformation.

While companies such as Samsung Electronics, LG Electronics, Hynix, Hyundai Motor, and Kia boast world-class competitiveness in TVs, mobile phones, semiconductors, and automobiles, in the “Top 1000 World Banks” ranking published by the British financial magazine The Banker, the highest-ranked Korean bank is KB Financial at 60th place, and no Korean bank is included among the world’s top 50 banks.

We are living in the era of “Big Blur,” in which the boundaries between industries have become indistinct.

In such an era, separation of banking and commerce regulations hinder the efficient use of capital.

For the overall development of the financial industry, these outdated separation of banking and commerce regulations should be eased.

The easing of separation of banking and commerce regulations should not be discussed simply from the perspective of the government’s shareholder return policy.

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Original title: 제3회: 금산분리 규제 완화가 필요한 진정한 이유

Author: Market Economy Colloquium

Date: 2025-02-21

Source: https://www.cfe.org/bbs/bbsDetail.php?cid=collo&pn=1&idx=27359