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Asian Review of Financial Research Vol.33 No.2 pp.279-300
An Optimal Separation Lapse Policy for Internet Banking : The Share-Holding Limit and Credit Exposure Constraint
Yang, Chae-Yeol 전남대학교 경영학부 교수
Song, Sooyoung* Professor, College of Business and Economics, Chung Ang University
Key Words : Separation Lapse,Industry Ownership Control,Loan Concentration Ratio,Self– Selection Mechanism,Internet Bank


In the financial industry, many transactions are doneperformed covertly to secure an information advantage over competitors in the market. Trading also demands expertise in risk management and the valuation of the assets under consideration to determine which trades will create value for investors. BecauseAs information asymmetries contribute to profitability, iesthey are intentionally sought by asset managers, meaning that purposefully created information asymmetries are unavoidable and likely to persist within the financial market. It is tthatTherefore, the government must regulate the financial industry more stringently than other industries, such as technology-based manufacturing industries. Moreover, the intensity of separation between banks and other businesses is impacted by the extent of implicit information asymmetries, because the soundness of the finance industry can be severely injured by the very existence of information asymmetries. Being able to distinguish between the positive effects of information asymmetries, which should be encouraged, and the negative impacts of information asymmetries, which should be prohibited, is more important than ever before. This paper investigates this distinction through the regulations set up by of the government. The regulation of the finance industry goes back to the era of laissez-faire capitalism, when the 1907 financial panic resulted in the establishment of the U.S. central bank, the Federal Reserve System. In the aftermath of the Great Depression, financial regulation cul-minated in the Banking Act of 1933, also known as the Glass Steagall Act, which separated Wall Street (banking) from Mmain Sstreet (commerce). Fewer than ten years after the repeal of the Glass-Steagall Act by the Financial Services Modernization Act of 1999, known as the Gramm-Leach-Bliley Act, the Great Recession broke out in 2008. As the economy recovers, although with a lower growth rate, and with the development and deployment of information technology such as artificial intelligence, there is again pressure to deregulate but in a different context. The emergence of Iinternet only banks poses a quite different but daunting challenge to the conventional notion of the separation of banking and commerce. Internet only banks foster competition within the banking industry, which has become more oligopolistic in the aftermath of the Great Recession. As these entrants require huge investments in the technical infrastructure to operate properly through the Internet while offering banking services, the traditional regulation of share-holding limits, which has worked effectively since 1933, faces an apparent obstacle. To promote the resilience and reinvigoration of the banking industry, the Korean government lifted its share-holding limit regulation and opened a path for funds from the information and communications technology (ICT) industry sto participate in the share ownership in the banking sector in 2015. This was, a step in the right direction. However, non-ICT investors are still banned from the banking industry. In the meantime, non-ICT industry capital can still participate in the Iinternet banking sector indirectly, either through ownership build-up in an ICT firm or by mimicking an ICT firm under the guise of the ICT industry, circumventing the ban effectively. The new investors in the Internet banking industry demand a further relaxation in share ownership, leading to a call for scrutiny of whether further deregulation promotes competition in the banking industry and enhances the soundness of the financial industry. Desirable self-selection is an important goal, and good quality Internet bank applicants should be allowed to acquire Internet banking licenses while bad quality applicants should not. There is considerable concern as to whether the government's current revision of the rule banning non-ICT investors from controlling Internet banks could lead to a sustainable separating equilibrium. This paper addresses this point and focuses on the adverse selection problem due to information asymmetries over the quality of prospective participants in the banking industry. The current combination of rules such as the share-holding limit and the loan concentration ratio could open the path to a desirable situation. As the lifting of the share-holding limit is accompanied by credit exposure control (particularly for the loan concentration ratio), it is possible that the ban benefits both Iinternet only banking participants and the government in light of the expected outlay in the case of a bailout due to non-performing loans. The paper demonstrates with a simple theoretical setup that a welfare enhancing outcome is within reach despite the separation lapse after we control the loan concentration ratio while allowing for greater ownership of Iinternet only banks by the ICT industry. This resultfinding will beis of great use to policy makers as they consider the implementation of new rules.
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