Market forces set to shape Korean banking sector

The banking deal between the unions and the Korean government is an unlikely victory for market forces.

The deal that was hammered out between the South Korean government and the banking unions on Tuesday night is incontrovertibly a victory for the government, the banks and by extension their shareholders. The success of the deal appears to hinge on one big misconception by the unions on the role of the government.

The unions strived to get the government out of management, presumably because they thought the government would either force layoffs or direct policy lending. Yet the government has said all along that it does not want to be involved in the day-to-day running of any bank û- even if it is the major shareholder. While it has been at the forefront of pushing the banks to merge, it has now agreed that the banks can do this on their own. And this means that the responsibility for layoffs now resides squarely with the banks.

For those banks that are in need of help, the government is still there to support them. Those banks that are owned by the government can still be merged. Those banks that fail to meet necessary financial criteria will still be eligible for public bailout funds. But the overall tenor of the agreement was thus: the unions said to the government "leave our banks alone" û the government said "gladly".

Perhaps the unions did not believe what has been apparent to outside observers for some time: the present Korean government of Kim Dae Jung is adamant that it will reform the Korean financial system, and one of the key platforms of that reform is to get the government out of business.

What this means is that market forces will now be left to shape the Korean banking landscape far more than even before. And these forces will be a much harder taskmaster than the Korean government will ever be. For those banks that have not and will not receive any public funds, and that do not have the government as their main shareholder, they are in the glorious position of for once being in charge of their own destiny. They can lend to who they want, employ who they want and û crucially û sack who they want.

When local banks such as Korea First Bank - under the tutelage of Newbridge Capital û start making vast amounts of profit on a shrinking asset and employee base, the other banks will have to sit up and take note. Whether they are government-owned or not, the banks will have to answer to shareholders. The demands by the unions to get government out of management have actually speeded up that process. It is now up to the management and employees of the banks to deliver the performance that shareholders demand.