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Capital market liberalization

In the early 1980s, the government allowed foreign banks to set up branches in Korea in order to attract foreign capital. The policy did not change in any significant way during the 1980s. In 1992, the government allowed foreign securities firms to open branches, but not subsidiaries, in Korea. In 1996, moves were undertaken to open the capital market wider due to Korea joining the OECD. In order to fulfill its obligations as a member, the Korean government announced a plan to remove gradually barriers to foreign portfolio investments and foreign direct investments in financial services from OECD countries. The key elements of the plan announced in September 1996 included the following: (1) Foreign banks and securities firms from OECD countries would be permitted to establish subsidiaries in Korea by 1998. (2) Foreign investment ceilings for investors from OECD countries were to be completely phased out by 2000. (3) Foreign investors from OECD countries would be allowed to establish and hold 100-percent ownership of any type of financial institution by December 1998. (4) Foreign investment consulting firms from OECD countries would be able to offer their services without establishing a commercial presence in Korea.

However, the liberalization process in the banking service sector was accelerated by the 1997 financial crisis. In order to attract foreign capital inflows, Korea opened its domestic bond market at the end of 1997 and proceeded to complete the opening of the domestic stock and money markets.

Important steps were taken in the spring of 1998 to increase foreign access to the financial sector in Korea. Foreign banks and securities firms were allowed to establish subsidiaries in April 1998. In addition, 100-percent foreign ownership of Korean financial institutions was allowed in the same month and foreign nationals were allowed to head Korean banks starting in May 1998. A branch of a foreign bank is treated as an independent financial institution and its operations are similar to those of subsidiaries of foreign banks, including retail businesses.

There are no restrictions on establishing subsidiaries of foreign banks in Korea. The establishment of a new commercial bank, whether domestic or foreign, requires only the permission of the Financial Supervisory Commission (FSC). The minimum capital required to establish a national commercial bank is 100 billion won, and 25 billion won for a regional bank. In addition, foreign banks in Korea have been allowed to establish local branches in the domestic market since March 1998. Foreign exchange positions are regulated and the maximum allowed oversold position in the spot foreign exchange market is 5 million dollars or 3 percent of capital, whichever is greater.

The previous limits to bank ownership of 4 percent for national banks, 8 percent for banks converted from other financial institutions and 15 percent for regional banks were eased by allowing the acquisition of shares in excess of these limits as long as the FSC was notified and gave its approval. Foreign bank ownership of up to 100 percent was permitted in April 1999, although subject to an additional review by the FSC in line with an increase in equity stakes beyond certain predetermined thresholds. Laws were enacted to strengthen the power of the board of directors at banks and to improve transparency in dealings with shareholders. Foreign directors have been permitted to sit on bank boards since May 1998. Any foreign bank that meets the same conditions as a domestic bank is allowed to enter the market. Korea First Bank was sold in September 1999 to Newbridge Capital, a U.S. private equity fund, which was followed by the sale of Korea Exchange Bank to Lone Star Funds, a U.S. equity fund, in 2003. Newbridge Capital subsequently sold Korea First Bank to Standard Chartered Bank in 2005.

Ceilings on stock investments by foreign investors were completely abolished in May 1998, with the exception of investments in state-owned enterprises. The trading of corporate and government bonds was completely opened to foreign investors at the end of 1997. Foreign investment in bonds issued by unlisted companies was allowed in July 1998. The market for commercial papers (CPs) and certificates of deposit (CDs) were partially opened in February 1998 and completely opened in May 1998. Restrictions on foreign investment in domestic securities were eliminated along with the requirement that domestic subsidiaries of foreign companies had to obtain government approval when bringing in more than 1 million dollars in financing from abroad. These measures led to an almost complete opening of the Korean capital market.

Source : SaKong, Il and Koh, Youngsun, 2010. The Korean Economy Six Decades of Growth and Development. Seoul: Korea Development Institute.

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