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Tue, Dec 23, 2003 - Page 12 News List

S Korea to curb foreign influence


South Korea's central bank has called for a change in government policy to curb the strong presence of foreign players in the country's banking industry.

The Bank of Korea (BoK) said in a report issued on Sunday that the level of foreign ownership in South Korean banks rose from 11.7 percent in 1998 to 30 percent this year.

As of Sept. 30, foreign investors held 39 percent of the listed shares of domestic banks, it said.

The rapid growth in the foreign presence could expose South Korea's banking sector to global financial volatility, although foreign banks were at the same time credited with introducing new techniques, improved services, a better credit rating system and risk management, it said.

Bank of Korea analyst Seo Young-Man stressed the report would not signal a change in South Korea's five-year-old campaign to open up its market.

"We see both negative and positive factors ... and our report must be taken as an independent expression of opinions concerning the banking sector," he said.

Seo, however, suggested that South Korea should exercise more prudence in privatizing banks and encourage domestic investors to play a larger role in the sector.

"From now, the privatization of financial institutions must be carried out carefully."

Emerging from the painful regional economic meltdown in late 1997, the government bailed out many debt-stricken financial institutions with state money and then sold them to foreign investors.

Policymakers still believe foreign capital will make local banks more transparent and competitive, while critics say the increased foreign presence threatens management control over the country's strategic corporations.

Seo said local institutional investors should be encouraged to invest in the sector, citing the amount of foreign currency reserves which reached a record high of US$153.04 billion this month.

"The need for foreign capital has now diminished in view of our foreign currency holdings and progress in efforts to improve the soundness of our banking industry," he added.

The central bank said the rapid growth in foreign ownership of South Korea's banking community could spur an outflow of national wealth and may squeeze credit lines for smaller companies.

"It will also intensify competition in the domestic market, aggravating bank profitability, impede policy coordination or lead to financial unrest," it said.

Korea First, Korea Exchange and KorAm banks, controlled by foreign owners, have tended to buy up treasury bonds and foreign exchange stabilization bonds, it said, adding they had also favored household lending by cutting corporate loans.

Local bankers now want the government to lift regulations on their ownership of financial firms.

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