Europe's most valuable bank has proposed putting up $6.3 billion to buy a controlling stake in KEB and now South Korea's Fair Trade Commission has approved the deal.
"The Fair Trade Commission analyzed the merger effects of HSBC and Korea Exchange Bank's products in eight markets, and concluded that there aren't any breaches of antitrust regulations,'' it said in a statement.
However, the Financial Supervisory Service has refused to give the deal the green light until the current owner of the stake HSBC is eyeing has resolved a legal dispute.
Lone Star is the owner of the 51.02 per cent KEB stake that HSBC has set its heart on; but the head of the private equity firm's South Korean business is due to appeal against a court ruling which found him guilty of undervaluing the stock price of a KEB credit card unit for his own ends.
Paul Yoo has been jailed and fined $6 million for manipulating figures to buy the unit cheaply in 2003.
No final approval will be given until Mr Yoo's appeal has been heard, authorities say.
In London HSBC's shares rose by 2.3 per cent in early morning trading, while in Seoul, KEB shares dropped by 1.2 per cent.