This content is from: Local Insights

South Korea

The Financial Supervisory Commission amended the Guidelines for the Authorization of Banking Business in July 2004. The amendments now include prerequisites that foreign financial institutions (including foreign financial holding companies) must satisfy to establish subsidiary banks in Korea. The amendments have also relaxed the approval standards for foreign banks wishing to set up branches in Korea.

The Korean banking industry has seen great improvements in profitability and stability since the first and second structural and legislative reforms, and it can now compete with advanced countries. As a result, long-term investments are a sought after form of investment for foreign capital entering the Korean banking industry.

Under the old guidelines, foreign financial institutions were restricted to conducting business in Korea through branches. However, due to the recent surge in interest and attempts by foreign investors to enter the Korean banking industry, the guidelines were amended to meet increasing demands of foreign financial institutions to enable the establishment of subsidiary banks. The requirements for the establishment of a subsidiary bank are:

  • The foreign financial institution must obtain the necessary legal and regulatory approvals of its home supervisory authorities at the Financial Supervisory Commission's request.
  • The foreign financial institution and its Korean subsidiary must be under the organized and systematic supervision of its home supervisory authorities.
  • The foreign financial institution should be an internationally recognized institution and managed under satisfactory financial and business conditions.
  • The foreign financial institution's existing subsidiaries and branches should also be under the organized management and supervision of its parent/holding company.
  • The foreign financial institution should, at all times, be able to provide the Financial Supervisory Commission with necessary and sufficient information for the supervision of its management and business operations in Korea.

The amended guidelines are expected to allow foreign financial institutions to actively enter the Korean banking industry, while providing greater protection to the domestic banking business by permitting a foreign financial institution's Korean branch to convert into a subsidiary if the branch becomes insolvent or the managerial capabilities of the home supervisory authority are in doubt.

Also, the amended guidelines no longer require that foreign financial institutions have substantial experience in the international financial business, allowing banks of developing countries to enter into the Korean banking sector. Banks in developing countries usually have closer economic relations to Korea, and thus, Korea's financial services industries are also expected to see enhanced business opportunities, as well as improved quality. Greater activity is expected in the exporting and importing industries between these developing countries and Korea, together with increased competition in the domestic financial industry.

On the whole, the new guidelines will contribute to the Korean government's efforts to promote Korea as the financial hub of Asia, and encourage the globalization of Korea's banking and financial markets.

Youngju Christine Park

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