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Validity of financial holding firms in question

KB leadership feud reignites skepticism about local financial umbrella system

It was the government’s hope in 2000 that by introducing the financial holding company system, it could reform the bank-dominated market and diversify the range of financial services available.

But it seems that the holding company structure is doing more harm than good.

The key trigger was the recent management feud between KB Financial Group, between the group chairman Lim Young-rok and bank president Lee Kun-ho.

The top officials’ collided over the matter of replacing the bank’s main computing system, but insiders say it was the last straw for the pair, as there had been a quiet but potent power struggle between Lim and Lee.

Some noted that the financial industry has reached a crossroads and has to make a decision ― whether to maintain the current financial holding company system or whether to break down the clusters to fit the individual needs of each unit.

“Under the current financial holding company system, the group chairman is entitled to all the rights, but he or she is free from responsibilities,” said Rep. Kim Ki-sik of the main opposition New Politics Alliance for Democracy.

Reflecting the concerns surrounding the KB Financial feud, the lawmaker held a policy forum late last month on the issue.

Other financial opinion leaders, such as the newly appointed Korea Money and Finance Association chairman, Kim Hong-beom, expressed similar thoughts.

“The financial holding company system was introduced through an arbitrary decision by the government, not as a voluntary move by the industry,” Kim said. “If not operated properly, it would be better to scrap the system altogether.”

The skepticism was further entrenched when the nation’s first-ever financial holding firm, Woori Financial Group, broke up, while the Industrial Bank of Korea, which had rejected the idea of a holding company, is experiencing smooth sailing.

As if on cue, Citibank Korea and Standard Chartered Bank Korea ― two of the top foreign banks here ― are also poised to fold their holding companies within the year or early next year.

According to the Korea Institute of Finance, 13 financial holding companies have been established since 2000, but most have failed to break away from the conventional bank-focused business model, with almost 80 percent of their aggregated assets in banking sectors.

Despite all the problems, however, current financial chiefs claim that the umbrella organization is a necessary evil in order to revive the long-stagnant market.

“(NH Financial) will become a role model for other financial holding companies, by suggesting a long-term strategy to its subsidiaries, but without interfering in their internal management,” said NH Financial Group chairman Yim Jong-yong.

The holding company system, according to Yim, is crucial in order to keep a balance between the banking and the nonbanking sectors.

NH Financial, which incorporates the agriculture-based NongHyup Bank, has recently stepped up as the nation’s fourth-largest financial group by merging Woori Financial’s securities houses.

Kim Jung-tae, chairman of Hana Financial Group, also spoke of the synergy effect of integration.

“In order to make it through the sluggish market conditions, the only way is to integrate (Hana Bank and Korea Exchange Bank) and to promote the group’s driving power,” Kim told reporters.

KB Financial chairman Lim, who has been reticent amid the ongoing sanction discussions, also hinted that the holding company system should not be abolished and that the current feud should be solved at all costs.

“Korea stands at a crossroads, where it needs to decide whether to adjust the current system to fit its reality, or whether to give up and find itself a new governance system,” said Kim Mun-ho, chairman of the Korean Financial Industry Union.

By Bae Hyun-jung (tellme@heraldcorp.com)
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