The government appears to be promoting a merger between Woori Finance Holdings Co. and KDB Financial Group to create a “mega bank” with assets exceeding 500 trillion won ($458 billion), roughly half of the nation’s gross domestic product.

The Public Fund Oversight Committee, which is tasked with recouping taxpayers’ money used to bail out distressed companies, will convene on May 17 to restart the process of privatizing Woori Finance, Korea’s second-largest financial holding company by assets.

The process was stalled in December following the committee’s failure to auction off the government’s 56.97 percent shareholdings in Woori Finance.

According to press reports, the government is likely to allow KDB Financial Group, a state-owned banking group that must also be privatized by 2014, to acquire an interest in Woori Finance.

To facilitate this process, the Financial Supervisory Commission reportedly plans to ease the regulations on financial holding companies. Currently, any financial holding company that intends to take over another is required to acquire at least a 95 percent stake in the target. The commission is expected to reduce the requirement to 50 percent in cases where the takeover target is a holding company that has been bailed out by the government.

If introduced as reported, this rule change will allow other financial holding companies to participate in open bidding for the Woori stake. But excluding KDB Financial, none of them ― KB, Shinhan and Hana ― have so far expressed any interest in it.

KDB Financial has already declared it will join the auction for the Woori shareholdings. Kang Man-soo, chairman of the group who has long championed the mega bank idea, last week said that the group had submitted its merger plan to the presidential office and the FSC.

Kang is not alone in pushing for a mega bank. FSC Chairman Kim Seok-dong has also stressed many times since his appointment in January the need to nurture large investment banks that can carve out a presence in global financial markets.

There is logic to fostering large, globally-recognized investment banks. First of all, they would spearhead the development of the Korean financial industry. They would also be able to reclaim some of the domestic M&A market that has been dominated by foreign investment banks. Another important rationale is that they could help Korean companies win large-scale infrastructure projects abroad.

But the mega bank idea is dangerous for a number of reasons. More than anything else, a mega bank would pose a significant systemic risk to the national economy. If it collapses, it could consign the nation to ruin. One need not go further than Korea’s 1997-98 financial crisis for an example.

A marriage between Woori Finance and KDB Financial would be all the more dangerous if realized because neither is particularly competitive in either investment or retail banking. Putting two not-so-competitive banks together does not automatically produce a competitive mega bank. Rather it would simply create a bank that is too big to fail.

Furthermore, the merger idea runs counter to the government’s privatization policy. The money that the PFOC would get by selling off the Woori stake will come from the government as KDB Financial is state-owned. It’s not privatization but nationalization. To collect the public funds, the new bank needs to be privatized, but its pumped-up size would make that more difficult.

Another concern is that the merged bank would become the main creditor bank for the nation’s 17 largest chaebol groups. The government could give the wrong impression that it is seeking to exercise influence on private companies through the bank.

Fostering investment banks is necessary. But it should not be promoted in a foolhardy way that heightens systemic risk to the national economy.