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Issue Report

Collection of full-length papers and in-depth analysis of economic and management issues.

The Effect of Rising Proportion of Foreign Banks on the Financial Market

The Effect of Rising Proportion of Foreign Banks on the Financial Market

PARK Hyun-Soo, et al.

Apr. 1, 2007

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Overseas Examples and Their Lessons

Since 2004, large foreign banks with global networks have entered the domestic banking industry in droves. Immediately following the 1997 foreign currency crisis, foreign equity funds entered the industry to purchase insolvent banks on the cheap then sell at higher prices. At the time, Korean government did not screen the investors carefully, for the banks needed immediate cash injection and the country as a whole was busy wooing foreign investors for restructuring purposes.

Foreign investment funds whose core business was not financial services, including New Bridge Capital (Korea First Bank), Carlyle Group (KorAm Bank), and Lone Star (Foreign Exchange Bank) went on buying spree, acquiring Korean banks while realizing huge profits from asset resale in the case of New Bridge and Carlyle. Of late, large financial service firms have increased their presence in Korea 's banking industry. Citibank and Standard Chartered, for example, have acquired KorAm Bank and Korea First Bank, respectively.

Thus, the share of foreign banks grew in the domestic banking industry. Combined market share of foreign banks, in terms of total assets, increased to 21.8% in October 2004 from a mere 5.0% in 1998. The handover of management control in banks such as Foreign Exchange Bank and KorAm Bank to foreign investors resulted in this dramatic rise in foreign banks' market share.

The expansion of foreign banks led to qualitative change in financial environment. The aggressive market expansion of foreign banks also resulted in increased competition in the banking industry. In the past, foreign equity funds had primarily been interested in improving market value of their target banks through reduction of non-performing loans and aggressive restructuring. In contrast, foreign banks today are determined to expand their market share in Korea.

This onslaught of foreign banks has forced domestic banks to defend their market territory through offers of special-rate deposit products and cuts in lending rates. In addition, changing environment in the industry may lead to a change in the financial market. Banks may adopt asset management strategies different from their past practices, in response to asset management and risk management strategies pursued by their foreign counterparts. In this way, the strategies of foreign banks may cause a chain reaction in corporate financing behaviors as well as in those of domestic banks. It is therefore essential to evaluate the effect of the increased presence of foreign banks.

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