Korea to liberalise bank ownership rules

Private equity firms and pension funds are to be allowed to own a larger share of voting rights in Korea's banks as the government seeks ways to boost their capital base.

The South Korean government is taking initiatives to widen the investor base of its banks and financial institutions in light of the global financial crisis. The government will make it easier for funds and foreign banks to be the main shareholders in local banks, according to Reuters.

“The global banking industry trend of growing big and the financial crisis require reasonable improvements to the current regulations which are excessive and strict,” the country's Financial Services Commission said in a statement. It added that loosened regulations would be positive for the growth of the country's banking sector.

According to the proposed changes in regulations, it will be easier for private equity firms and foreign banks to invest in Korean banks. Pension funds such as the $165 billion National Pension Service will also be permitted to invest in banks.

The new regulations, which will be submitted for parliamentary approval later this year, will allow industrial groups and non-financial companies to hold 10 percent of voting rights in domestic banks, up from the current four percent.

According to Korea's Yonhap news agency, supporters of the plan have welcomed the proposed changes saying it will help the government to find investors for stakes in Korea Development Bank, Woori Finance Holdings and Industrial Bank of Korea, all of which are controlled by the Korean government.

The proposed changes, if they become law, are likely to be welcomed by private equity firms, especially in light of the problems faced by private equity firms investing in Korea's banking and financial services sector.

In September this year, HSBC walked away from its August 2007 deal to acquire US private equity firm Lone Star's 51 percent stake in Korea Exchange Bank (KEB) for $6.3 billion. The deal did not get regulatory approval as there were question marks over the procedure by which Lone Star acquired KEB in 2003.

It was a frustrating time for both parties, which spent a year trying to assuage the concerns of regulators and get the deal approved. Lone Star's tale of woe goes back further to January 2007, when it was forced to abandon the sale of its stake in KEB for $7.3 billion to Kookmin Bank as regulators did not approve the deal.

The new regulations, however, could potentially restore private equity firms' confidence in the sector.