U.S.-Korea Free Trade Agreement: Potential Economy-wide ... - USITC

Box 4.2 Financial services: Competitive conditions
The Korean banking industry was the world’s nineteenth largest in 2005, with $676 billion in assets, or less than
1 percent of the global total. By contrast, U.S. banks account for the largest share of world assets (15 percent) valued
at $59.7 trillion in 2005, and are very competitive in open markets. Since 2003, the Korean government has undertaken
financial-sector reform measures toward the goal of turning Korea into a regional financial hub by 2020. As such, the
financial sector has undergone consolidation and become more accessible to foreign firms. Foreign investors currently
own an estimated 40 percent of Korea’s banking sector, including two of the country’s official national commercial
banks, which are owned by Citigroup (U.S.) and Standard Chartered Bank (UK). In 2006, the top ten foreign banks
operating in Korea, three of which were U.S. firms, controlled 25 percent of the commercial banking market. Despite
the regulatory reforms, however, foreign firms still have difficulty achieving the same level of market penetration as
their domestic counterparts, partly due to remaining regulatory hurdles, and partly due to cultural issues.
The insurance industry in Korea is the second largest in Asia, following Japan, in terms of premiums written. In 2006,
life and non-life insurance premiums were valued at $33.5 billion and $14 billion, respectively. The life insurance sector
is highly consolidated, with the top three firms accounting for 74 percent of the market. Foreign firms, the most
prominent of which include Allianz First Life (Germany), ING (Netherlands), and Prudential (U.S.), hold an estimated
10 percent of market share. In the nonlife sector, the three largest firms hold 54 percent of the market, and foreign
participation is minimal, at less than one percent.
Sources: EIU, “Country Finance: South Korea,” February 2007; and EIU, “South Korea: Financial Services
Profile,” January 5, 2007.
Box 4.3 The interpretation of tariff equivalents 1
The Commission estimated the tariff equivalent (TE) for banking services consistent with Korea’s current GATS
commitments on banking to be 76 and its latest Doha Round GATS offer to be 59 percent. The Commission estimated
that the TE associated with Korea’s commitments in the FTA is reduced to 29 percent. Tariff equivalents are a measure
of the percentage increase in prices due to trade impediments relative to the prices that would exist in the absence
of trade restrictions. The decline in the TE represents both the lowering of barriers to entry and barriers to operation
for U.S. firms in Korea and the lowering of the price of banking (intermediation) services.
Specifically, the decline in the TE from the GATS Uruguay Round commitments reflects decreased barriers to the
acquisition of existing Korean firms, reduced residency requirements for senior executives, and the elimination of
minimum investment restrictions for foreign direct investment. Further reductions in the TE from the GATS Doha Round
offers to the FTA reflect the reduction of restrictions in the cross-border supply of certain financial information services,
the elimination of Mode 2 restrictions on Koreans’ consumption of banking services outside Korea, and the increased
ability of foreign banks to offer a full range of financial products. The reduction in Korea’s TE in the banking sector
applies only to U.S.-based financial institutions. As such, U.S.-based financial institutions may realize a competitive
advantage in the Korean market relative to financial institutions based in third-country markets.
The Commission estimated the price effects of trade barriers on net interest margins (NIMs), which are the spread
between lending and deposit interest rates, using a two-stage econometric model. The first stage of the modelcorrected
NIMs for the effects of prudential regulations, which promote the stability of the financial system but increase
the price of banking services. This first-stage model incorporated firm-level data from 1,400 banks in over 50 countries,
including Korea. The second stage of the model isolated the effects of trade restrictions after controlling for a number
of country-level market variables. The Commission used GATS schedules and the FTA text, including the annexes
on nonconforming measures, to identify trade restrictions. The Commission assigned scores to market access and
national treatment commitments on the seven activities defined as banking services in the GATS. The services
included deposit taking and lending services, as well as fee-based services.
1 The tariff equivalents estimated here are not directly comparable to the ad valorem equivalents used in the
Commission’s computable general equilibrium model described in chap. 2 of this report. A full description of the
analysis and methodology used is presented in app. H.
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