Ok-Rial Song, A Review of the Separation of Banking and Commerce Rules for Holding Companies, The Economic Law Journal, Vol. 20(3) (2021), pp.21-44.
<Abstract>
Under the Korean Fair Trade Act, financial holding companies cannot own companies other than financial companies, and general holding companies cannot own financial companies. In general, this “separation of finance and commerce” aims to prevent industrial risks from being contagious to finance sector, and to prevent financial institutions from being used as financial sources to expand the economic power of chaebols, i.e., Korean conglomerates. This regulation seems rather unusual, in that it also applies to financial companies other than banks. This paper argues for the repeal of the above regulations. First of all, there is no reason for the Fair Trade Act to prohibit financial holding companies from commercial companies, since it has nothing to do with concentration of economic power, which is one of the purposes of the Korean Fair Trade Act. In fact, a similar provision already exists in the Financial Holding Companies Act. Furthermore, in Korea, financial companies, especially banks, have no history of expanding economic power through the ownership of commercial companies. The reason is not clear, but the peculiarities of the Korean banking industry and the dispersed ownership structure of financial holding companies are likely to have something to do with the such history. In the end, the problem to be solved by this regulation did not actually exist. Regulations that prohibit general holding companies from owning stocks in financial companies are not convincing, either. First, it is difficult to find similar regulation in other countries. Restricting the ownership of non-bank financial companies are very rare, and if necessary, it merely requires to examine the qualifications of controlling shareholders. Second, the current regulation discriminates, without any theoretical basis, the corporate groups which chose to move to the holding company structure. Several non-holding company groups already have a significant number of non-bank financial companies. If the holding company system is adopted, it is still permissible to hold non-bank financial companies as affiliates companies existing outside the holding company. As of now, no theoretical foundation was found on such discrimination. Third, the notion of the “financial” companies can be extended very far, and thus several service industry can be regarded as a “financial” sector. Non-bank financial companies have no systemic risk in the event of bankruptcy, no incentives for large shareholders to pursue excessive risk, and little particular advantage in using their funds to expand control. Thus, it is difficult to find the policy why they were not allowed to own these financial companies. As such, the separation of finance and commerce under the Fair Trade Act needs to be carefully examined.
<Keywords>
corporate group, holding company, financial holding company, separation of finance and commerce, expansion of economic power, financial industry
Ok-Rial Song, A Review of the Separation of Banking and Commerce Rules for Holding Companies, The Economic Law Journal, Vol. 20(3) (2021), pp.21-44.
<Abstract>
Under the Korean Fair Trade Act, financial holding companies cannot own companies other than financial companies, and general holding companies cannot own financial companies. In general, this “separation of finance and commerce” aims to prevent industrial risks from being contagious to finance sector, and to prevent financial institutions from being used as financial sources to expand the economic power of chaebols, i.e., Korean conglomerates. This regulation seems rather unusual, in that it also applies to financial companies other than banks. This paper argues for the repeal of the above regulations. First of all, there is no reason for the Fair Trade Act to prohibit financial holding companies from commercial companies, since it has nothing to do with concentration of economic power, which is one of the purposes of the Korean Fair Trade Act. In fact, a similar provision already exists in the Financial Holding Companies Act. Furthermore, in Korea, financial companies, especially banks, have no history of expanding economic power through the ownership of commercial companies. The reason is not clear, but the peculiarities of the Korean banking industry and the dispersed ownership structure of financial holding companies are likely to have something to do with the such history. In the end, the problem to be solved by this regulation did not actually exist. Regulations that prohibit general holding companies from owning stocks in financial companies are not convincing, either. First, it is difficult to find similar regulation in other countries. Restricting the ownership of non-bank financial companies are very rare, and if necessary, it merely requires to examine the qualifications of controlling shareholders. Second, the current regulation discriminates, without any theoretical basis, the corporate groups which chose to move to the holding company structure. Several non-holding company groups already have a significant number of non-bank financial companies. If the holding company system is adopted, it is still permissible to hold non-bank financial companies as affiliates companies existing outside the holding company. As of now, no theoretical foundation was found on such discrimination. Third, the notion of the “financial” companies can be extended very far, and thus several service industry can be regarded as a “financial” sector. Non-bank financial companies have no systemic risk in the event of bankruptcy, no incentives for large shareholders to pursue excessive risk, and little particular advantage in using their funds to expand control. Thus, it is difficult to find the policy why they were not allowed to own these financial companies. As such, the separation of finance and commerce under the Fair Trade Act needs to be carefully examined.
<Keywords>
corporate group, holding company, financial holding company, separation of finance and commerce, expansion of economic power, financial industry