🚨 Industrial-Financial Separation

Today Korean Social News for Beginners | 2025.10.02

0️⃣ Debate on Easing Regulations for AI Investment and Concerns About Economic Concentration

📌 Considering Easing Industrial-Financial Separation for AI Investment… President Lee Signals Support for Samsung and SK Funding

💬 President Lee Jae-myung announced that he would consider easing Industrial-Financial Separation regulations to help major Korean companies like Samsung and SK secure funding for their massive AI projects with OpenAI. The government believes that financial regulations need to be more flexible to raise the huge amounts of money needed for semiconductor facility expansion and AI infrastructure. The presidential office suggested possible regulatory adjustments with safeguards to prevent monopolies and economic concentration. However, there are strong concerns about side effects like expanded financial control by large business groups and reduced access to funding for small businesses. Finding the right balance between fostering industry for global AI competition and maintaining economic democracy is the key challenge.

💡 Summary

• Industrial-Financial Separation is a regulation that separates industrial and financial capital to prevent large corporations from controlling financial companies.
• President Lee Jae-myung announced consideration of easing Industrial-Financial Separation to boost AI investment.
• Finding the right balance between strengthening industrial competitiveness and preventing economic concentration is important.

1️⃣ Definition

Industrial-Financial Separation means a regulation that separates industrial capital (companies) from financial capital (banks, insurance, etc.) to prevent large corporations from controlling financial companies or using finance for private gain. Also called "Industrial-Financial Separation," it is a system designed to prevent large business groups from owning banks and other financial institutions to monopolize funds or use them for illegal inheritance and succession.

This system was first introduced with the 1982 Banking Act revision and is also regulated by the Fair Trade Act and the Financial Holding Companies Act. It has become a core system to prevent economic power from concentrating in specific business groups, protect the public nature and neutrality of finance, and ensure small businesses have access to funding.

💡 Why is this important?

• It is a core system that prevents economic concentration by large business groups and promotes fair market competition.
• It protects the public nature of finance and ensures funding access for small businesses and ordinary people.
• It is an important mechanism to prevent illegal inheritance and unfair internal transactions by large corporations.
• It serves as a policy standard for finding balance between economic democratization and industrial development.

2️⃣ Background and Current Status of Industrial-Financial Separation

📕 Background and History of Industrial-Financial Separation

• It was introduced to prevent the harmful effects of large business groups controlling finance. Key background includes:

  • In the 1970s-80s, problems arose when business groups owned non-bank financial institutions and monopolized funds.
  • Cases of providing favorable loans to affiliated companies or propping up failing businesses with finance were frequent.
  • During the 1997 financial crisis, reckless expansion by business groups and financial insolvency drove the national economy into crisis.
  • After that, Industrial-Financial Separation regulations were strengthened further, making large corporations' ownership of banks fundamentally prohibited.

• It is regulated by the Fair Trade Act and financial laws. Key legal bases include:

  • The Fair Trade Act limits voting rights of large business groups with assets over 5 trillion won in financial and insurance companies.
  • The Banking Act limits industrial capital's voting rights in banks to within 4%.
  • The Financial Holding Companies Act strictly limits non-financial major shareholders' ownership of financial holding company stocks.
  • The Insurance Business Act also has provisions limiting large corporations' control of insurance companies.

📕 Main Content of Current Industrial-Financial Separation Regulations

• Large corporations' voting rights in financial companies are strictly limited. Key regulations include:

  • Large business groups with assets over 5 trillion won basically cannot exercise voting rights in financial and insurance companies.
  • For banks, industrial capital cannot hold more than 4% of voting shares.
  • Even in exceptional cases, strict requirements and supervision apply.
  • Violations result in penalties such as fines, voting right restrictions, and stock disposal orders.

• There are also restrictions on Corporate Venture Capital (CVC) operations. Key limitations include:

  • Large corporate holding companies' establishment of CVCs was allowed in 2021, but only as 100% subsidiaries.
  • External funding is restricted, limiting large-scale investments.
  • Investment targets are also limited to certain ranges, making free investment difficult.
  • It becomes an institutional obstacle when large-scale investment in advanced industries like AI and semiconductors is needed.

💡 Key Issues in the Debate on Easing Industrial-Financial Separation

1. Economic concentration concerns: Possibility of deepening large business group monopolies through financial control
2. Harm to small businesses: Worsening funding difficulties for small businesses if large corporations dominate finance
3. Abuse for illegal succession: Concerns about supporting affiliated companies and passing wealth through financial companies
4. Industrial competitiveness: Counter-argument that falling behind in global AI competition is a risk
5. Creating safeguards: What conditions and supervision systems to establish if easing is crucial

3️⃣ AI Investment Debate and Pros and Cons

✅ Position in Favor of Easing Industrial-Financial Separation

• There is a strong sense of crisis about falling behind in global AI competition. Key arguments include:

  • Companies in major countries like the US and China are investing huge amounts in AI infrastructure.
  • Samsung and SK need tens of trillions of won to cooperate with OpenAI.
  • Current regulations prevent large corporations from raising funds through finance, weakening competitiveness.
  • The argument is that regulatory easing is inevitable for semiconductors and AI as national strategic industries.

• The position is that easing is possible with appropriate safeguards. Key measures include:

  • Strictly limiting investment purposes to advanced fields like AI and semiconductors.
  • Establishing independent supervisory bodies to thoroughly monitor fund use.
  • Allowing only temporarily for a certain period and evaluating results.
  • Preparing strong penalty provisions for unfair internal transactions or illegal inheritance.

✅ Position Against Easing Industrial-Financial Separation

• There are concerns that economic concentration by large business groups will intensify. Key problems include:

  • If large corporations dominate finance, market dominance will be maximized and fair competition will collapse.
  • Loans and investments favorable to affiliated companies or owner families are likely to occur.
  • Small businesses and startups will have more difficulty raising funds, deepening polarization.
  • The public nature of finance will be damaged, worsening financial access for ordinary people and vulnerable groups.

• There are criticisms that creating effective safeguards is realistically difficult. Key concerns include:

  • Past cases show that controlling side effects after regulatory easing has not been easy.
  • Supervisory agencies lack the personnel and expertise to effectively check large business groups.
  • Once eased, it is difficult to strengthen again, which may lead to irreversible results.
  • There is a risk of starting with the justification of AI investment and gradually expanding to other areas.

4️⃣ Related Terms

🔎 Fair Trade Act

• The Fair Trade Act is a core law that promotes fair market competition.
  • The Monopoly Regulation and Fair Trade Act (Fair Trade Act) is a law that promotes fair and free competition by prohibiting abuse of market-dominant positions, unfair collaborative acts, and unfair trade practices. Enacted in 1980, it serves as the basic law for Korea's competition policy.
  • Main content of the Fair Trade Act includes: First, prohibition of abuse of market-dominant positions regulates unfair practices by monopolistic companies. Second, regulation of large business groups (conglomerates) restrains economic concentration. Third, corporate combination regulation prevents competition restriction through M&A. Fourth, prohibition of unfair trade practices prevents abuse of superior bargaining positions.
  • Industrial-Financial Separation is a core means of restraining economic concentration under the Fair Trade Act. Large business groups with assets over 5 trillion won basically cannot exercise voting rights in financial and insurance companies, and violations result in fines and corrective measures. This Industrial-Financial Separation easing debate may lead to amendments to the Fair Trade Act.

🔎 Corporate Venture Capital (CVC)

• CVC means venture capital where large corporations invest in startups.
  • Corporate Venture Capital (CVC) is venture capital established or operated directly by large corporations, which invests in startups or innovative companies to secure new technologies and explore business opportunities. Google Ventures and Intel Capital are representative examples.
  • Advantages of CVC include: First, large corporations can quickly acquire new technologies and business models. Second, startups can use large corporations' infrastructure and networks along with funding. Third, innovation across the entire industry ecosystem is promoted. Fourth, it helps strengthen large corporations' competitiveness and secure new growth engines.
  • In Korea, establishment of CVCs by large corporate holding companies was only allowed in 2021, but only as 100% subsidiaries with restricted external funding. Due to this, there are limits in fields requiring large-scale investment like AI and semiconductors, so improvements to CVC regulations are being considered along with this Industrial-Financial Separation easing debate.

🔎 Economic Concentration

• Economic concentration is the phenomenon of a few large corporations dominating the economy.
  • Economic concentration means a phenomenon where a few large corporations or business groups occupy a significant portion of the national economy and exercise market dominance. It refers to a state where specific business groups' share of economic indicators like sales, assets, and employment is excessively high.
  • Problems of economic concentration include: First, growth opportunities for small businesses and small merchants decrease. Second, market competition is restricted, slowing innovation and reducing consumer choice. Third, income inequality and polarization intensify. Fourth, large corporations' management failures can deal a major blow to the entire national economy.
  • Industrial-Financial Separation is a core system to prevent economic concentration. If business groups dominate finance as well, economic concentration is maximized through fund monopoly, unfair internal transactions, and illegal inheritance. Prevention of economic concentration is being raised as the most important opposing argument in this easing debate.

🔎 International Cases of Industrial-Financial Separation

• Major developed countries also operate Industrial-Financial Separation, but methods vary.
  • The United States regulates Industrial-Financial Separation through the Bank Holding Company Act (BHC Act) and the Financial Services Modernization Act (GLBA). Industrial capital's control of banks is fundamentally prohibited, but financial investment is possible under certain conditions. It operates under strict supervision by the Federal Reserve (Fed).
  • Japan maintains the principle of Industrial-Financial Separation through the Antimonopoly Act and Banking Act, but is more flexible than Korea. Industrial capital's holding of bank controlling shares is limited to 5%, but some combination of finance and industry is allowed in holding company form. Traditional business groups like Mitsubishi and Mitsui have financial affiliates.
  • Germany and France have relatively weak Industrial-Financial Separation. They adopt Universal Banking, where banks provide a wide range of financial services, and cross-holding between industrial and financial capital is considerably allowed. However, they control side effects through strong supervisory systems.

5️⃣ Frequently Asked Questions (FAQ)

Q: If Industrial-Financial Separation is eased, what impact will it have on ordinary citizens?

A: There are both positive and negative aspects, requiring a careful approach.

• Positive aspects include: First, if large corporations' AI and semiconductor investment becomes more active, related industries will develop and jobs will increase. Second, if global competitiveness is strengthened and the national economy grows, benefits can return to all citizens. Third, opportunities to enjoy new services and products through innovative technology development will increase.
• Negative aspects include: First, if large corporations dominate finance, loan interest rates for small businesses and ordinary people may rise or accessibility may worsen. Second, economic concentration may intensify polarization and increase income inequality. Third, as large business groups' market dominance strengthens, consumer choice will decrease and small business survival will become more difficult. Fourth, financial instability may increase, adding risk factors to the national economy.
• Therefore, if easing occurs, it is important to clearly limit investment purposes, thoroughly monitor unfair internal transactions, and prepare protections for small business and ordinary people's finance.

Q: How do other countries operate Industrial-Financial Separation?

A: Each country adopts different methods according to historical background and economic structure.

• The United States has strictly maintained Industrial-Financial Separation as a lesson from the Great Depression when banks' reckless securities investment expanded the economic crisis. Although partially eased in 1999, it was strengthened again after the 2008 financial crisis, fundamentally prohibiting industrial capital's control of banks. However, a certain range of financial investment is allowed under strong supervision by the Federal Reserve.
• Japan introduced Industrial-Financial Separation during the postwar dissolution of business groups but is more flexible than Korea. Financial groups like Mitsubishi UFJ and Sumitomo Mitsui are linked with industrial affiliates, maintaining close relationships between companies and banks through the main bank system. Industrial capital's bank stock holdings are limited to 5% but there are many exceptions.
• Europe has relatively weak Industrial-Financial Separation by adopting Universal Banking. Germany's Deutsche Bank and France's BNP Paribas provide various financial services including investment banking and insurance while being banks, and cross-holding with industrial capital is allowed. Instead, they manage risks through international financial regulations like Basel Accords and strong supervisory systems.
• Korea maintains the strictest Industrial-Financial Separation among developed countries due to serious economic concentration problems by business groups. This easing debate can be seen as an attempt to find balance while considering this historical context and raising global competitiveness.

Q: Are there ways to invest in AI without easing Industrial-Financial Separation?

A: There are various alternative methods, and many opinions say these should be examined first.

• First, the government can directly create AI investment funds or provide low-interest loans through public financial institutions. If the Korea Development Bank and policy financial corporations actively engage in advanced industry investment, private funds can flow in together. Second, companies can directly raise funds in the market through corporate bond or stock issuance. Large corporations like Samsung and SK have high creditworthiness and can sufficiently raise funds in capital markets.
• Third, there is a plan to strengthen cooperation with foreign investors. For the OpenAI project, forming a consortium with global investors participating can secure funds regardless of Industrial-Financial Separation regulations. Fourth, there is a method to improve CVC regulations to allow external funding and expand investment scope. This is a compromise that can activate investment without undermining the fundamental principle of Industrial-Financial Separation.
• Finally, there is a plan to utilize large corporations' retained earnings. Major large corporations already hold hundreds of trillions of won in cash assets, and strategically allocating these to AI investment can enable considerable scale investment. Experts argue that these alternatives should be sufficiently examined first rather than easing Industrial-Financial Separation.

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