Under the auspices of Financial Service Commission (FSC), the Korea Institute of Finance, Korea Insurance Research Institute, and the Korea Capital Market Institute held a symposium on February 8th discussing the future blueprint that will guide the Korean finance sector to leap forward as a leader of Asian Finance. The core of their seven month cooperative research is the hub and spoke strategy, the notion which was used as the cornerstone in developing Korea as a financial hub of Asia.
It is no news that the Korean economy developed at an amazing speed over the past decades. However, as the three institutions pointed out, the finance sector remains weak. According to the world competitiveness indexes last year from International Institute for Management Development (IMD) and World Economic Forum (WEF), the Korean financial sector lags behind – ranking 33rd and 58th in the world in terms of financial sector competitiveness and its maturity, respectively. Thus the blueprint announced by the three institutions lays out detail plans in creating Korea into a competitive financial hub of Asia. The outline discusses the hub and spoke strategy as well as four subdivision plans focused on promoting stability, efficiency, competitiveness, and the development of the Korean finance sector.
The Hub and Spoke Strategy
Originally coined by Frederick Smith from Yale University, the term hub and spoke strategy refers to a distribution network model. However, when applied to finance, the term describes a management model where the hub refers to several big sized banks, and spoke refers to various banks operating abroad. The two activities – big sized banks as well as banks moving abroad operates simultaneously in the model. In this way, Korea can stretch the influence of its finance sector to nearby countries and still link the activities to its domestic base.
Such strategy is precedent in countries such as Australia and Singapore. The institutions note the efforts of Singaporean financial companies such as Development Bank of Singapore in localizing its branches in Asian countries such as Hong Kong, India, and China. The Australian case also shed light on the future path of Korean finance – Australian financial companies have actively reached out to Asian countries after its restructuring and have succeeded in reinforcing its competitiveness.
A more specific role model that follows the hub and spoke strategy is Santander Bank in Spain. The bank has succeeded in glocalisation: in absorbing local human resources and establishing marketing network in Hispanic countries. Afterwards, it succeeded in increasing its size through M&A. Such example shed light on the importance of strategic approach to glocalisation of the finance industry.
The institutions also note that hub and spoke strategy must be accompanied with building comparative advantage through specialization. To match the already competitive financial hubs of Asia such as Singapore and Hong Kong, it is crucial for the Korean finance industry to have its comparative advantage. The institutions suggest the Korean financial industry could specialize in derivative products, and develop a niche market involving ship related finance and trade finance. In addition, they also noted its potential in specializing in asset management service backed with IT technology and internet business which are already developed in Korea.
The Four Sub Goals: Promoting Stability, Efficiency, Competitiveness, and Development
The hub and spoke strategy is incomplete only with promoting glocalization. Substantial sub goals have been noted: the institutions pointed out the need to promote stability, efficiency, competitiveness, and development of the Korean financial sector.
Despite the remarkable stability of the Korean financial sector amidst the financial crisis, the institutions firstly noted the problem regarding foreign exchange liquidity. Such is especially a problem in Korea – massive foreign exchange loan occurs during boom for investment in real estate and the bubble deflates during bust, with a rapid withdrawal of foreign currency. The blueprint suggests regulating banks to secure enough won when foreign exchange loan rate escalates and preventing foreign exchange risk. Another problem to tackle is household debt. Along with the increase in real estate prices, mortgage rates increased, reaching up to 50.9% of total financial assets in Korea in the third quarter last year. This observation can be a potential problem if the real asset prices decrease rapidly. The feasible policy recommendation was to postpone pay down schedules and alleviate interest burdens for borrowers.
Reinforcing efficiency refers to improving the overall market policies to expand the operation of the financial market. The imminent problem is the imbalance in the short term loan exchange market – it is overtly leaned towards the call market. Thus it is crucial to reinvigorate the repurchase agreement and commercial paper market. Another policy suggestion is targeted at alleviating public announcement obligations to listed corporations, and also rebalancing the stock exchange load among securities, KOSDAQ, and Freeboard market which is currently imbalanced towards KOSDAQ.
The competitiveness target involves globalization of domestic financial companies. The institutions suggest promoting M&A abroad in order to create 2-3 global banks that can rank as top 10 Asian banks in ten year time frame. Also, the current developments in privatizing public banks such as Woori and Korea Development Bank are in track with this trend – the strategy is to create 1-2 large global banks and 3-4 mid-sized banks for domestic demand. In the case of investment banks, the institutions suggest specialization. Rather than increasing competition among large banks, it is more feasible for them to operate within their specialized boundaries. Such specialization involves the development of unique financial products and fostering skilled manpower.
The final criteria – the development of the financial sector indicates restructuring corporate governance and enhancing investor protection. The recent financial crisis has triggered a new discussion on restructuring the board of directors system which has proven to be ineffective. Investor protection also has been discussed globally: for instance, the U.S is currently considering the establishment of consumer Financial Protection Agency. The institutions suggest the reinforcement of investor protection by enacting an Investor Protection and Financial Product Sales Act in the long run.
The blueprint is broad and deep. Whether the suggestions will actually be pursued or not remains to be further discussed among the private sector, and the government in the upcoming months.