As the Lee Jae-myung administration moves to ease separation of banking and commerce regulations to boost investment in innovation industries such as artificial intelligence (AI) and semiconductors, expectations are rising for looser restrictions on banks' equity investments in innovative companies. The Democratic Party of Korea is reviewing a plan to selectively relax the separation of banking and commerce to transfer bank funds concentrated in real estate to innovation industries.
According to political and financial circles on the 20th, the Democratic Party of Korea is said to be reviewing ways to offer incentives when banks invest in innovative companies. Options under discussion include selectively easing equity investment regulations limited to investments in innovation industries.
A Democratic Party of Korea official said, "We are designing a policy direction that gives incentives to banks that invest in innovative companies and penalties to banks that focus on real estate loans," adding, "However, there are internal dissenting voices, so any regulatory easing should be transparent and limited."
The separation of banking and commerce is a regulation that separates financial and industrial capital. Currently, industrial capital can hold only up to 4% of a bank's equity, and can increase its stake to 10% only if it does not exercise voting rights. Conversely, financial holding companies can acquire up to 5% of voting equity in general companies, while banks and insurers can acquire only up to 15%.
The financial sector has long argued that separation regulations hinder financial companies' investment in innovation industries. In the case of banks, because of equity investment restrictions, they mostly support innovative companies in the form of loans. For financial holding companies, the path to investing in innovative companies is effectively blocked. Even if a financial holding company or a bank makes indirect investments through a fund, if the fund invests heavily in corporations, equity holding limit regulations may come into play.
In response, financial authorities have pushed since 2022 to ease separation regulations but achieved little. In the end, they only relaxed the equity investment cap in fintech for financial holding companies from 5% to 15%. This was because they faced opposition from the Democratic Party of Korea, then the opposition party.
Recently, President Lee Jae-myung personally ordered a review of "easing separation regulations" for advanced industries such as AI and semiconductors, shifting the mood. The core of the separation policy that Lee ordered is easing regulations on corporate venture capital (CVC).
The aim is to seek expanded investment in mega-scale facilities by easing regulations that block large-scale fundraising by corporations. Under the current Monopoly Regulation and Fair Trade Act, general holding companies cannot have financial subsidiaries, but since 2021 the government has selectively allowed the establishment of CVCs for new-business investments. However, a CVC under a holding company must be a 100% subsidiary, and only up to 40% of its investment funding can be raised externally. Options under discussion include lifting external investment restrictions to broaden the scope of capital management. The financial sector also expects that restrictions on banks' equity investments in industrial capital will be eased together.
On the same day, Financial Services Commission Chairperson Lee Eog-weon appeared at the National Policy Committee's audit and said both financial companies and corporations need eased separation regulations. Lee said, "As we increasingly face situations that require large-scale investment, there have been calls to rationalize and improve separation regulations," adding, "We will consult with relevant ministries on how to resolve the issues and come up with practical measures."