Financial Services Commission Finalizes Method for Regional Banks to Convert into Commercial Banks... "Strict Screening"

New Approval Application Replaced by Approval Content Change Review
"Internal Control Requirements and More Will Be Thoroughly Examined Without Omission"

The procedure for converting regional banks into commercial banks was finalized on the 31st of last month. The key point is that when a regional bank converts into a commercial bank, the process will proceed as a review of changes to the approval contents instead of a new approval examination. The Financial Services Commission (FSC) will begin a full-scale conversion review after DGB Daegu Bank submits its approval application.

At a regular meeting held that day, the FSC established the approval method and procedure for the conversion of regional banks into commercial banks. This follows the government’s announcement last July to promote the conversion of regional banks into commercial banks. Since there was no precedent for a regional bank like Daegu Bank converting into a commercial bank, the approval criteria under current laws such as the Banking Act were not clearly defined. Under current law, commercial banks, regional banks, and internet banks must all obtain approval from the FSC pursuant to Article 8 of the Banking Act to operate banking businesses.

The FSC and the Financial Supervisory Service concluded that regional banks converting into commercial banks must follow the ‘change in approval contents’ method according to the banking business approval regulations under Article 8 of the Banking Act. However, the FSC stated that even if the change in approval contents method is followed, the conversion to a commercial bank constitutes a change in important matters, so all detailed examination requirements stipulated by law (such as major shareholder requirements and business plan feasibility) will be reviewed as if it were a new approval.

On the 9th, officials were busy moving in the corridor of the Financial Services Commission at the Government Seoul Office in Jongno-gu, Seoul, where financial authorities decided to promote a plan to include mortgage loans (Judaemae) in the 'debt refinancing' infrastructure scheduled to be launched in May by the end of the year. Financial authorities explained that they aim to reduce the interest burden on mortgage loans by establishing a debt refinancing platform that allows users to compare loan interest rates across the financial sector at a glance and switch loans easily. Photo by Dongju Yoon doso7@

In particular, considering the expansion of the bank’s business scope, detailed management-related examination requirements such as business plans, internal controls, and executive qualifications will be thoroughly scrutinized. Necessary procedures such as the external evaluation committee and stakeholder opinion collection, which are part of the process to verify the validity of examination requirements, will be conducted without omission.

The FSC stated that last year’s illegal securities account opening incident at Daegu Bank will not affect the application for conversion to a commercial bank. This is because the financial accident does not constitute a disqualification reason for major shareholders under the Banking Act’s approval requirements nor a reason to suspend approval examination under the Banking Business Supervision Regulations. However, if sanctions against executives related to the financial accident are expected, the application must include a plan of action for the relevant executives. The external evaluation committee will review the appropriateness of this, and the FSC intends to strictly examine the internal control system during the review process.

The FSC plans to explicitly reflect the conversion method and procedure through future amendments to the Banking Act.

With the conversion method to commercial banks decided, Daegu Bank is expected to submit its approval application to the FSC as early as the beginning of next month. Daegu Bank meets the criteria for capital and other requirements for conversion to a commercial bank. According to Article 8 of the Banking Act, the capital requirement for commercial banks is at least 100 billion KRW. Daegu Bank’s capital was 700.6 billion KRW as of the third quarter of last year.