Banking Act

The Banking Act (은행법) is an act that ensures the sound operation of financial institutions, the efficiency of the fund brokerage functions, consumer protection and maintenance of the order of credit. The Act covers various kinds of financial institutions except the Bank of Korean, which are engaged in lending funds raised by bearing debts from many unspecified persons through the receipt of deposits and issuance of securities and other bonds. (Article 2(1) of the Act)

The Act was wholly amended in 1998 right after the so-called IMF Crisis, and recently revised on May 17, 2010 by Act No. 10303.

Key words
banks, financial institutions, Banking Act, prudential requirement, safe and sound banking

Legislative Intent
The purpose of this Amendment is (i) to enhance competitiveness and autonomy of banking and asset management through deregulation, (ii) to revamp provisions regarding outside directors and to legislate internal guidelines on company structure in order to uplift managerial transparency and liability, (iii) to proscribe unfair business practices such as compensating balance in order to reinforce customer protection, and (iv) to re-stipulate laws in Korean Hangeul and to make difficult terms more comprehensible.

Main Points
The gist of the latest amendment to the Banking Act is as follows:
 * The Amendment details authorization requirements previously contained in the Enforcement Decree, and it demands banks to maintain their minimum capital stock requirements after the authorization. (Articles 8 and 9)
 * The Amendment lowers control by substituting ex-ante consultation to ex-post notification for the opening of overseas offices and etc. The exceptional ex-ante notification may be imposed considering managerial soundness of the bank, and Financial Services Commission may order supplementation if that notification reveals threat to managerial soundness and market stability. (Articles 13 and 47)
 * To strengthen the independence of board of directors, the Amendment raises the ratio of outside directors from "no less than half" to "more than half," and provides detailed grounds for disqualification of outside directors. (Article 22)
 * To professionalize the Audit Committee, the Committee shall have at least one certified public accountant or financial expert as its member. To strengthen the independence of the Committee, Commercial Act will apply mutatis mutandis to outside director appointment as a member of the Audit Committee, consequently restricting the voting right of majority shareholder. (Article 23-2)
 * Internal guidelines on company structure - the principles and formalities the board of directors shall abide by to protect the interests of the shareholders and customers - must be arranged and published. (Article 23-4 newly added)
 * While directly stipulating bank's primary business, the Amendment allows transition to comprehensive operation of secondary business by ex-ante notification with possible limits and correctives regarding managerial soundness and market stability. (Article 27-2 newly added)
 * The Amendment makes reasonable modifications on concurrent business in conformity with the changes made in the Act on the Financial Investment Services and Capital Markets and Insurance Business Act, and deregulates operation of concurrent business from mandatory authorization of Financial Services Commission to ex-ante notification with possible limits and correctives regarding managerial soundness and market stability. (Article 28)
 * The Amendment imposes fair-management duty on the banks to prevent conflict of interests between banks and customers or customers and customers as a result of the modification of concurrent business. The detailed method and procedure of the duty shall be incorporated into self-regulation guidelines provided by the Enforcement Decree. (Article 28-2 newly added)
 * Impractical regulations existing from the legislation year of 1950, such as prohibitive clauses on loans for goods and securities speculations are deleted. (Article 38)
 * The Amendment proscribes unfair banking practices such as compensating balance in order to protect rights and interests of the customers and to establish sound financial order. (Article 52-2 newly added)
 * The advertisement of merchandises, e.g., deposit programs or loan programs, shall elucidate the range of interest rate, calculation system, and etc. not to mislead customers. (Article 52-3 newly added)