US Financial Rule Blocking KDB`s O`seas Expansion

The U.S. financial regulation “Volcker Rule” is a significant variable affecting the privatization plan for Korea Development Bank.

KDB aggressively tried to buy a Thai bank but was blocked by the rule. Moreover, the regulation is expected to block the Korean bank’s plan to go public in Korea in 2011 and in the global stock market in 2012.

KDB is the first bank to give up a bank takeover due to the Volcker Rule. Other Korean banks that have also attempted advances into the global market are watching KDB’s failure and are worried over the negative fallout.

○ Obstacles in privatization process

KDB did not participate in the tender Monday for Siam City Bank, the seventh-largest commercial bank in Thailand. KDB Financial Group Chairman Min Euoo-sung had paid a three-day visit to Bangkok from Jan. 17, talked with the Thai bank, and said, “We are highly likely to acquire the bank.”

A KDB source said, “It’s possible that certain conditions of acquisition would have put a burden on management in the future. Given that no one can accurately predict how the discussion on the Volcker Rule will go, our attempt to acquire the Thai bank also caused too many uncertainties.”

Financial experts forecast that KDB’s plan for overseas expansion will be postponed for a considerable time because of its failed bid for Siam City Bank, following its failure to purchase Lehman Brothers in 2008.

The series of failed M&A attempts could force KDB to change its privatization strategy, under which it planned to boost its value by acquiring overseas retail banking networks and then go public.

A high-ranking KDB official said, “We’re considering how to change our internal and external strategies. It’ll be hard to make a decision over the near term.”

○ Negligible effect on expansion of other banks abroad

Certain Korean banks are worried over negative effects from KDB’s failed takeover. Experts, however, expect no ill effects.

The Volcker Rule is designed to separate commercial banks from investment banks. KDB is the only Korean bank, however, that is highly likely to be subject to the Volcker Rule since it has many characteristics of an investment bank.

That is why Korean financial authorities frowned at the KDB’s recent moves, which seemed to go against global trends in financial regulation.

Woori Bank wants to buy Hanmi Bank, an overseas Korean-run commercial bank based in Los Angeles. Shinhan Bank plans to expand the network of Shinhan Bank America. Hana Bank is eyeing expanding its Indonesian subsidiary PT Bank Hana.

The three banks say their plans will not be blocked by the Volcker Rule since they are simply seeking to expand their commercial banking networks or acquire other commercial banks.

Others say the Volcker Rule will accelerate the reorganization of the Korean financial market if KDB focuses on the domestic market while postponing its overseas expansion plans.

One analyst said, “For the time being, KDB Financial Group will find it hard to expand its retail banking business by acquiring other banks. If it attempts to expand its financial investment business with help from Daewoo Securities and KDB Asset Management and its insurance business with support from Kumho Life Insurance, competition would intensify in relevant sectors.”

cha@donga.com peacechaos@donga.com