Korea and foreign investment

Standard Chartered Bank chairman Brian Sanderson, in a recent meeting with Roh Moo-hyun, said SCB’s experience in Korea had been positive so far. It will be remembered that SCB bought Korea First Bank, South Korea’s eight-largest lender, from US private equity firm Newbridge Capital and the Korean government for around $3.2bn a year ago, sneaking in front of a rumoured approach by HSBC.

From the perspective of supervising the local banking market, hearsay evidence is that Korea’s banking regulator, the Financial Supervisory Service, adopts a robust approach similar to other countries where the domestic banking market has significant ownership by large and sophisticated foreign players: the local regulator wants to fully understand what is done in their jurisdiction, and have some say over it. This is an attitude which is understandable even if it requires an investment by the bank concerned. In implementing the upcoming international bank regulatory changes, Basel II, the FSS is sticking to the official timetable even though Korea is not a signatory to Basel (which is more than can be said for the US); and unlike some other jurisdictions is reportedly taking advantage of the rule upgrade to get rid of the archaic requirement on branches of overseas banks to hold capital locally. All this is consistent with ensuring a well-regulated market friendly to overseas investors.

There is understandable sensitivity to having foreign players come in and take over a market. At one point there was a reported move to introduce a requirement on foreign-owned banks to have at least half of its local board to have Korean citizenship, with the remainder to have lived in Korea for a year prior to appointment. I recall the FT reported this on its front page, highlighting the anti-competitive aspects. While this proposal never made it into law, the board of Korea First Bank, SCB’s subsidiary is 50% Korean. (Links here and here)

But the activities of foreign less active investors also attract understandable attention. The large gains made by Carlyle, Lone Star (60 prosecutors raided their Seoul office today) and Newbridge on the sale of their local bank holdings, which were tax free from the Korean perspective, are leading to calls for new tax laws to ensure the Korean taxpayer gets some benefit from these gains. Similarly, the alleged abuse of the Samsung share price by the UK pension fund manager Hermes all lead to suspicion of foreign investors. Justified outrage or chauvinism?

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