Korea’s financial regulator said Sunday it would ban local lenders from paying out dividends to their respective holding companies as part of efforts to drive out the “greedy practices” of the financial sector.

The Financial Supervisory Service, which voiced its opposition to excessive dividend payments on several occasions, asked the banks to file capital soundness plans for the next five years.

The plans should include banks’ dividend targets, and the FSS would put a ceiling on the figure to block generous dividends from reaching the pockets of large shareholders. 

The banks are yet to clarify their position on the new regulation. Their most recent payout of dividends sparked controversy here. The growing sense of unfairness felt by the public is in line with the Occupy Wall Street movement that swept the U.S. and elsewhere last year in protest against financial firms’ oversized profits.

The latest move by the FSS would hurt local banks that have adopted a holding company structure, including KB, Shinhan, Woori, Hana and SC.

The blockage of dividends from banks to their holding firms leaves virtually no extra money for shareholders, thus making it difficult for large shareholders or special interest groups to take a lot of money in the form of dividends.

The FSS is also moving to put a limit on the amount of dividends directed toward banks’ holding companies.

The dividend payout to financial holding firms would be allowedly only for exceptional cases such as repayment of debt and operating capital.

Local lenders posted a combined profit of 11.5 trillion won ($9.9 billion) in the first three quarters of last year. Even considering the reduced profits in the fourth quarter, the total income of 2011 would surpass 12 trillion won by a wide margin, the biggest since 2007. Following sharp rise in income fueled largely by the widened gap between lending and borrowing costs, banks announced they would increase the amount of dividends to shareholders.

Many Korean banks received an injection of public funds when they were on the verge of bankruptcy, a fact that the regulators said justifies its anti-greed restrictions.

The new regulatory move on dividend payouts, however, is expected to put downward pressure on the share prices of banks, which in turn touch off opposition from shareholders.

By Yang Sung-jin
(insight@heraldcorp.com)