Blog Post

The state of foreign bank branches in Korea

Foreign bank branches in Korea have gradually gained importance, increasing their share of the total assets of the Korean banking industry from 6.3 percent in 2000 to 14.2 percent in 2009. But recently, both their growth and profitability have been stagnant. The likelihood of either closures or asset sales is increasing, especially with the rapidly deteriorating performance of US and European bank branches. Thus, monitoring the repatriation of funds from Korea to the foreign banks’ headquarters should be strengthened, while the Bank of Korea and Financial Supervisory Committee should put in place a plan to handle potential large-scale capital outflows.

By: Date: May 16, 2012 Topic: Banking and capital markets

Foreign bank branches in Korea have gradually gained importance, increasing their share of the total assets of the Korean banking industry from 6.3 percent in 2000 to 14.2 percent in 2009. But recently, both their growth and profitability have been stagnant. The likelihood of either closures or asset sales is increasing, especially with the rapidly deteriorating performance of US and European bank branches. Thus, monitoring the repatriation of funds from Korea to the foreign banks’ headquarters should be strengthened, while the Bank of Korea and Financial Supervisory Committee should put in place a plan to handle potential large-scale capital outflows.

From 2000 to 2009, the foreign bank branches’ total assets grew by 6.1 times from 47.6 trillion won (€40 billion) to 292.6 trillion won (€158 billion) (see Table 1), at a CAGR (Cumulative Annual Growth Rate) of 22.4 percent. And as a result, the market share of foreign bank branches (using total assets) increased from 6.3 percent to 14.2 percent during this period. Yet due to mergers and acquisitions, and financial difficulties in their home territories, the number of foreign bank branches in Korea fell from 43 in 2000 to 37 in 2009.

However, the total assets of foreign bank branches decreased sharply in 2010 by 42.9 trillion won, or 14.7 percent, to 249.7 trillion won (Table 1). The decrease was attributable primarily to European and US bank branches.

After the peak of profitability in 2008, the foreign bank branches, especially those of US and European banks, continued to face a worsening trend through 2011 (Table 2).

The foreign bank branches’ net profit decreased by 45.5 percent in 2011 to stand at 1.2 trillion won compared to 2.2 trillion won in 2008. And, return on equity dropped from 19.5 percent in 2008 to 8.2 percent in 2010. The number of foreign bank branches recording net losses has continued to rise since 2008: 2008 (1), 2009 (1), 2010 (3), and 2011 (5).

US and European bank branches recorded a net profit of 0.6 trillion won in 2011, a decrease of 64.7 percent from 1.7 trillion won in 2008. The Asian bank branches’ net profit peaked in 2009 and the decline in profit was less significant afterward.

On the other hand, by 2011 the profit of Korean-owned banks returned to almost the pre-crisis level, though return on equity is below its pre-crisis peak (Table 3).

The Korean Financial Supervisory Service should monitor the global operations of foreign banks to prepare for potential bank closures because of the European crisis and the poor performance of foreign bank branches. In addition, the Bank of Korea should put a plan in place to handle potential large-scale capital outflows.

Between 2000 and 2010, 11 foreign bank branches closed their operations in Korea (five foreign bank branches entered the market during the same period). With this in mind, it is imperative that monitoring of home-country business operations is strengthened through cooperation between the regulators of the host and home countries.

In accordance with Article 62 (Domestic Assets of Foreign Financial Institutions) in the Banking Act of Korea, domestic customers are first to receive reimbursements from the bank in case of foreign bank branch closures. However, it is important to keep in mind that regulators must closely monitor and manage those foreign bank branches that repatriate excessive funds before closure since this could potentially make it difficult for the foreign bank branches to service their debts in Korea.

In addition, it is important to have a contingency plan ready in cases of foreign bank branches closing due to internal financial difficulties and/or inability to perform their core operations. Currently, the US is preparing to implement the Volcker Rule, which forbids proprietary trading. Once the Volcker Rule takes effect, foreign bank branches from the US are likely to reduce their investment portfolios significantly.


Republishing and referencing

Bruegel considers itself a public good and takes no institutional standpoint. Anyone is free to republish and/or quote this post without prior consent. Please provide a full reference, clearly stating Bruegel and the relevant author as the source, and include a prominent hyperlink to the original post.

Read about event More on this topic
 

Upcoming Event

Dec
9
14:00

How to deal with small banks: consolidation, tailoring and the fintech challenge

Small banks face multiple challenges. What structural changes are needed to tackle these pressures?

Speakers: Alexander Lehmann, Nicolas Véron, Xavier Vives, Anne Fröhling and Philip Evans Topic: Banking and capital markets
Read article More on this topic More by this author
 

External Publication

L’Union européenne et les États-Unis, un an après

Après une année troublée par Kaboul et AUKUS, qu'avons-nous retenu de l'an I de la présidence Biden ? Maria Demertzis revient sur les évènements marquants de l'année 2021 pour la relation entre les États-Unis et l'Union européenne.

By: Maria Demertzis Topic: Global economy and trade Date: December 8, 2021
Read article More on this topic More by this author
 

Podcast

Podcast

What to watch in 2022: China's economic outlook

Our end of 2021 recap of China’s economic activities.

By: The Sound of Economics Topic: Global economy and trade Date: December 8, 2021
Read article More by this author
 

Blog Post

European governance

The Global Gateway: a real step towards a stronger Europe in the world?

Disappointment at the lack of fresh cash from European Union global connectivity strategy is short-sighted: Europe supports global development more than any other country in the world. Using existing funds more strategically is the right priority for now.

By: Simone Tagliapietra Topic: European governance, Global economy and trade Date: December 7, 2021
Read article More on this topic More by this author
 

External Publication

Country case studies on resolving problem loans in Europe: Crises, policies and institutions

Contribution to 'Nonperforming Loans in Asia and Europe—Causes, Impacts, and Resolution Strategies' published by the Asia Development Bank.

By: Alexander Lehmann Topic: Banking and capital markets Date: December 3, 2021
Read about event
 

Past Event

Past Event

China’s medium term outlook: Will innovation save China from becoming old before it becomes rich?

What can China do to stop the deceleration of its economy. Is innovation the solution?

Speakers: Jean-Francois Di Meglio, Alicia García-Herrero and Guntram B. Wolff Topic: Digital economy and innovation, Global economy and trade Date: December 1, 2021
Read article More on this topic More by this author
 

Podcast

Podcast

A new consensus for economic resilience

Is there a need for systemic reform of global economic governance?

By: The Sound of Economics Topic: Global economy and trade Date: December 1, 2021
Read article Download PDF More on this topic More by this author
 

External Publication

Chinese economic statecraft: what to expect in the next five years?

Chapter from 'Storms Ahead: the Future Geoeconomic world order' on the expectations from the next five years of Chinese economic policy, published on 27 October 2021.

By: Alicia García-Herrero Topic: Global economy and trade Date: November 26, 2021
Read about event More on this topic
 

Upcoming Event

Jan
20
14:00

Is China’s private sector advancing or retreating?

A look into the Chinese private sector.

Speakers: Reinhard Bütikofer, Nicolas Véron and Alicia García-Herrero Topic: Global economy and trade
Read about event More on this topic
 

Past Event

Past Event

Advancing global value and supply chains to mitigate the challenges arising from the pandemic

Session at the 1st ASIA-EUROPE ECONOMIC AND BUSINESS FORUM: Transitioning to a New Normal: Leveraging Global Value Chains, Multilateralism and the 4IR

Speakers: Carmen Cano, Alicia García-Herrero, Jong Woo Kang, André Sapir, Luca Silipo and Tetsuya Watanabe Topic: Global economy and trade Location: Phnom Penh, Cambodia Date: November 24, 2021
Read about event More on this topic
 

Past Event

Past Event

The UK strategy for Green Finance

This members-only event discusses the UK's strategy for greening the financial system.

Speakers: Adam Lyons, Fayyaz Muneer and Nicolas Véron Topic: Banking and capital markets Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: November 22, 2021
Read article More by this author
 

Blog Post

Fiscal arithmetic and risk of sovereign insolvency

The record-high debt levels in advanced economies increase the risk of sovereign insolvency. Governments should start fiscal consolidation soon in an environment of low nominal and real interest rates and post-COVID growth.

By: Marek Dabrowski Topic: Global economy and trade, Macroeconomic policy Date: November 18, 2021
Load more posts