In international practice, economic groups do not set up their own banks. Many countries have regulations restricting the establishment of such banks, while some others do not allow the existence of these banks. There are several reasons behind the restriction:

1. Investors can get the highest business effectiveness if they do business in the fields which have close relations. Meanwhile, industry and trade prove to be fields dissimilar to finance and banking, which are fields that require high risk management and governance capability.

2. The countries aim to prevent economic groups from using their own banks to mobilise capital from the public and then lending it to members of the groups. The loaning inside the groups may lead to latent risks as the loans do not meet the high requirements on risk management.

3. The problems relating to corporate governance. Banks have a system of thick regulations on risk management they have to follow (internal auditing, credit risk management, network information management), while economic groups sometimes do not pay appropriate attention to this system. In fact, a bank is just a part of the group; therefore, the way of corporate governance of the bank should not be far different from the common way applied by the groups. 

What would you say about the current growing tendency of setting up banks under economic groups?

I know that many economic groups are planning to establish their own banks. They think that a powerful economic group needs to have a bank and an insurance company. These groups are mainly state owned and established under the Prime Minister’s decision. To date, there is still no perfect legal framework regulating the establishment and operation of economic groups, since this is still the pilot period for the economic group’s establishment.

The bank share market has been developing well in the last time, and this has prompted many general corporations to shift to operate under the mode of economic groups, which then ask for permission to establish banks. This should be seen as a worrying sign. As the model of economic groups is being implemented on a trial basis, the establishment of banks under economic groups is also being carried out on a trial basis. There will be a report, reviewing the establishment of the banks under groups, but I fear that it will be too late to wait until the review.

How many economic groups have asked to establish their own banks and what is the percentage?

Most of the economic groups approved by the Prime Minister have the ambitious plan of setting up their own banks. Meanwhile, you may have heard that even regional and world economic groups, namely Honda, Toyota, Samsung, Sony, Hyundai, LG and Petronas do not have their own banks. The US, which gathers several tens of thousands of powerful industrial groups, also does not have banks under economic groups. The owners of industrial and trade groups may have stakes in banks, but they do not have independent banks which are parts of their groups. What will happen if all economic groups can produce banks?

What is your viewpoint about this?

I think it is the right time for experts and state management authorities to ‘awaken’ policy makers, groups and central banks to keep cautious when licencing banks under economic groups.

If really necessary, an economic group can set up a bank, but the government should limit the percentage of stakes the group can hold in the bank, in order to ensure the benefit of smaller shareholders.

In fact, the regulation on licencing joint stock banks dated June 7, 2007, clearly stipulates that an institutional shareholder can hold up to 20% of the chartered capital of a bank, and it can only make capital contribution to one bank only. However, economic groups all are trying to ask for permission to contribute 40-45% of total capital in banks. In one case, a group even asked to hold up to 51% of stakes, which should be seen as a latent high risk.

Source: Lao dong.