South Korea advised to shun foreign investment for banking equity sales

The South Korean government has been advised by a think-tank sponsored by the Bank of Korea to sell its stake in South Korean banks only to other banks and not to private equity funds.

Amid public animosity in South Korea toward US funds, a report from the Institute for Monetary and Economic Research said that while these private foreign investors have contributed to financial stability in South Korea, they had done very little for the nation’s banking sector.

Cost efficiency, determined by a bank’s expenses over its assets, seems to be the main issue.

The report found that foreign-run banks improved cost-efficiency from 10.7 percent in 2000 to 9.8 percent in 2004, but that Korean-controlled banks improved efficiency even more, from 12.6 percent in 2000 to 8.3 percent in 2004.

While the report is seen as a slap against foreign private investment funds because the cost-efficiency data is couched in terms of foreign-run versus Korean-run institutions, the report advises against selling to either foreign or domestic private funds.

Much of the resentment toward foreign funds comes from the fact that when they turn around and sell their interests in Korean banks, they often conduct their business through tax havens and end up making huge profits without paying any tax in south Korea.

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