South Korea's central bank think-tank has said that the government should reduce the influence of foreign capital in the domestic banking sector by encouraging local investors to take over local banks.
Foreign private equity funds have done little to improve efficiency in the nation's banking sector as they only focused on maximizing returns on their investments, the Bank of Korea's Institute for Monetary and Economic Research (IMER) said in a report published late on Tuesday.
"The government should encourage local financial capital to actively participate in the privitization of state-controlled banks and should relax regulations over the size of private equity funds," it said.
The report comes amid persistent concerns here that foreign investors threaten major South Korean firms with hostile takeover bids and are only interested in short-term capital gains.
The institute also suggested South Korean financial institutions should be sold only to international banks, not to short-term private funds, if the government cannot find a proper domestic buyer.
"Foreign private equity funds which moved into the domestic banking sector from 2000 contributed to financial stability but failed to improve cost efficiency," IMER researcher Kang Jong-ku said.
The report said there had been an improvement in efficiency but it was less than that achieved by locally controlled banks.
The cost efficiency of foreign-controlled banks such as Korea Exchange Bank and Korea First Bank, as determined by expenses in relation to assets, improved from 10.7 percent in 2000 to 9.8 percent last year, IMER said.
However, the efficiency of domestically controlled banks improved from 12.6 percent to 8.3 percent, it said.
Foreign-controlled banks have also favored household lending for safer returns and increased their capital base.
The average capital adequacy ratio of foreign controlled banks rose from 10.4 percent to 11.5 percent last year, while that of domestic lenders rose from 10.6 percent to 11.2 percent.
A higher capital adequacy ratio means a bank is well positioned to protect depositors and maintain its stability and efficiency.
Huge gains that foreign funds Carlyle Group and Newbrige Capital have made from the sale of their stakes in Koram Bank and Korea First Bank, respectively, have provoked strong criticism of foreign funds.
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