Conflicting financial policies raise concern over banking operations

A row of ATM machines belonging to banks are lined up in Seoul, April 27. Yonhap

President Lee Jae Myung’s financial policies are drawing concern for being contradictory — tightening market controls on one hand, while underlining the need for co-prosperity among firms, investors and other market stakeholders on the other.

According to economists and industry officials on Friday, these conflicting policy demands are hitting banking groups the hardest.

They noted that the demands involve mortgage loans, deposit-loan interest rate gaps, shareholder dividends and debt forgiveness — all of which directly impact banking operations.

“I’d say the Lee administration’s financial policies are simply a paradox of administrative control over finance,” an economics professor said on condition of anonymity.

“Policies that try to regulate finance while also demanding market-friendly interest rate structures are significantly out of touch with reality," he added.

He was referring to the government’s pressure on commercial banks to lower lending rates and raise deposit rates — a move that aligns with rising public criticism of banks for allegedly “reaping excessive profits from interest.”

However, the latest housing regulation is ironically contributing to an even wider interest rate spread between loans and deposits.

Announced on June 27, the regulation requires banks to cut their annual loan volume to 50 percent of what was planned for the first half of the year.

The measure is in response to a sharp rise in home prices.

As a result, Korea Federation of Banks (KFB) data showed that the average interest rate spread between household loans and deposits at the five biggest commercial banks — KB Kookmin, Shinhan, Hana, Woori and NH NongHyup — stood at 1.42 percent at the end of June.

The figure marks the second-highest since the KFB began compiling the data in July 2022, following a peak of 1.47 percent in March this year.

The five, along with smaller banks nationwide, are maintaining lending rates in the range of 4 percent despite a falling benchmark interest rate.

The measure is to ensure that only financially sound borrowers take out loans.

On the other hand, these banks’ interest rates on one-year deposits was 2.57 percent at the end of June, down 0.97 percentage points from a year earlier.

On the stock market, the government is urging listed banking groups to increase shareholder dividends in a bid to boost the market and tackle the longstanding discount on valuations.

At the same time, the government is ramping up pressure for various contributions in the name of co-prosperity, potentially undermining the shareholder return capacity of these banking companies.

For instance, the companies are being asked to take part in a 350 billion won ($252.1 million) project aimed at writing off debts for small businesses.

The government is also considering a revision to the tax law within this year and to double the tax rate — from 0.5 percent to 1 percent — on financial institutions with annual revenue exceeding 1 trillion won.

“The government’s policy direction is inconsistent, making banking groups confused over whether they can fully concentrate on increasing shareholder dividends while observing tighter restrictions,” a bank PR official said.