The Germans have recognised these structural weaknesses and are taking steps to rectify them. However, one major obstacle to German banks divesting their industrial holdings has been the prohibitive capital gains tax. Now a Social Democrat government has proposed tax reforms that will remove this obstacle, and pave the way for banking and industrial conglomerates to untangle their web of cross shareholdings. In Asia, both South Korea and Japan relied on close association between banking and commerce in the earlier stages of their industrialisation. South Korean chaebols, and the banks that lent to them, are now facing painful reforms. Poor lending practices by Korean banks disguised the deteriorating finances of the chaebols, and eventually nearly brought the whole system down in the Asian crisis. In Japan, the pre-war zaibatsu system became the post-war keiretsu system. Each major keiretsu or industrial group consists of companies linked together through a web of cross-shareholdings, including a main bank. Keiretsu members support one another financially and in terms of direct business. The bank in the keiretsu plays a pivotal role, facilitating the financial transactions of the group. While the keiretsu system helped Japan to rebuild and industrialise its economy after the war, many of the problems of corporate governance and unsound banks that now plague Japan are rooted in this structure. The prolonged crisis of the Japanese economy since 1990 has forced a fundamental rethink. The Japanese are now gradually starting to make basic structural changes.
Scope of permitted activities MAS will determine the scope of activities which the bank or FHC will be permitted to undertake. Besides financial activities, they will include activities which have clear synergies with the bank’s financial business. We will not have a fixed list of permitted activities. Instead we will exercise flexibility to allow banks to undertake business ventures that are related to their core competencies, such as e-commerce activities that are changing the banking industry worldwide. These include providing payment services in support of e-commerce, and leveraging on banks’ IT competencies to provide IT services, especially in building infrastructure and applications for B2B e-commerce. Banks will also be allowed to undertake equity portfolio and venture capital investments. We will define an equity portfolio investment to be one where the bank and its financial affiliates do not have control over the investee company, e.g. by being the largest shareholder. An equity portfolio investment should generally not exceed 10% of the investee company’s capital. Furthermore, each equity portfolio investment will be subject to a single security limit of 2% of the bank’s capital funds. We will amend Section 31 of the Banking Act to remove the existing aggregate limit on portfolio 5  BIS Review 53/2000  investments, and replace it with this new single security limit. We will also exclude debt instruments from Section 31 because they are generally less risky than equities. Venture capital investments will be treated separately.