The governing Grand National Party is twisting the arms of banks to set aside 10 percent of their profit to lend to the underprivileged. Socializing banking profit goes against the free market principle and may infringe upon the Constitution.
The GNP and the Korea Federation of Banks (KFB) have agreed, in principle, on a scheme to create a 1 trillion won fund from next year.
The program is to provide extra funds for the poor denied loans due to their poor credit status. The government will lose more than they will gain through the program.
The plan looks politically attractive but economically unattractive. Many of the loans will go sour as they are Christmas gifts for credit defaulters. The arbitrary rule will face opposition from banks, especially foreign ones.
Foreign investors will hesitate to invest in local banks as their return will fall. CEOs of local banks will reluctantly follow the rule out of fear that they might be kicked out. This financial repression should end as it will create an image problem for Korea.
The KFB is also under fire for dovetailing the politicized policy. The federation is funded by member banks and should promote the interests of the banks.
Investors may go to the Constitutional Court for a review of the plan as it clearly violates the free-market capitalistic principle guaranteed in the Constitution. This plan appears part of the government’s scheme to narrow the widening income gap between the rich and the poor.
The government should use the budget for such welfare programs for the alienated. Bankers will try to raise the cost in an attempt to create additional income to offset the misguided lending program. It means the government wants to raise the cost for 99 percent of bank customers for the benefit of 1 percent of the poor.
The Lee administration has already extorted money from conglomerates to create a lending pool, called the Sunshine Loan, for the credit defaulters.
An attempt to socialize banking profit reflects the prevailing misguided mentality under the Lee Myung-bak administration. The administration has set the clock of local banks back decades ago, when authoritarian regimes abused and politicized banks.
For the past three years, it has not left banks alone. The governing camp has ousted incumbent CEOs and installed President Lee’s cronies at such banks as KB Financial Group and Woori Financial Group. The parachute-style appointment of cronies is pervasive not only at banks but also at other non-banking financial companies.
The global image of local banks is at its nadir. In addition to the pervasive state intervention, power struggles inside the nation’s third largest bank, Shinhan, has also raised the question whether regulators are doing their job well.
No OECD country is extorting money from banks for the poor. Korea, the chair of the forthcoming G20 Summit in Seoul, should not project the image that it is socializing capitalism.