Koreans love to hate banks.
Banks are often compared to umbrella lenders who entice people into borrowing their goods on a sunny day, but take them away when it rains.
Large lenders have prospered with such a selfish strategy. They offer loans when liquidity is overflowing and withdraw them when the money dries up. If the Bank of Korea raises its benchmark interest rate, commercial banks immediately apply it to their lending rates. When the central bank lowers the key rate, banks reflect only part of it and usually, as late as possible.
They regularly feast on money. Last year, the average annual salary of employees at the five largest banks exceeded 100 million won ($74,460). Banks paid 350 million won to volunteer retirees as just compensation, larger than the entire severance pay of many other professions.
When the banks run into trouble, due to financial crises, the government bails them out with taxpayer money. The money business in Korea is exactly what it sounds like -- the easiest and safest means of making money.
President Yoon Suk Yeol is one of the harshest bank bashers. Yoon has criticized banks on more than a few occasions this year. In February and July, the president accused them of throwing “money parties.” This week, Yoon said many small business owners and self-employed people feel like “servants” to banks due to the harsh lending terms. He then pointed out that many of the issues stem from banks’ de facto oligopoly status.
Few Koreans would take issue with the president’s accusations directed at the banks. Some will applaud him. However, a national leader’s criticism of a specific sector should entail steps to rectify and improve it. The government’s follow-up moves so far have been less than satisfactory. It is not difficult to predict what will occur in the next few months. As he did some months ago, Yoon’s top financial regulator will visit the five biggest banks and wring out additional “financial co-prosperity plans.”
The temporary lowering of lending rates and delayed maturities will help some borrowers in a crunch. Still, the question arises over whether the government should force private businesses to give part of their profits back to society. The president’s remarks seem to reflect his doubts about reasonable interest rates. If so, regulators, instead of twisting the arm of banks, should see that lenders are not unfairly passing on costs to borrowers and increasing their profits at the expense of depositors when setting interest rates.
Intermittent emotional outbursts and makeshift measures can distort the market. Nothing showed this better than the recent debate on debts.
Since the financial crisis subsided, countries have shifted to financial stringency, soaking off excess liquidity. Korea went the opposite way. To ensure the soft-landing of the housing market, the government eased lending rules, encouraging people to take out mortgages and buy homes. Soon came the post-COVID-19 high-interest era, increasing the financial burden shouldered by indebted households and turning many young homebuyers into bad debtors. One can never reduce borrowing with low lending rates.
So, Kim Dae-ki, Yoon’s chief-of-staff, was right when he warned that household debt would lead to an emergency situation many times graver than the Asian financial crisis. But Kim was completely wrong and irresponsible when he blamed the previous administration.
It was the incumbent administration that made interest rates move differently from other countries and the market theory. Of course, it was necessary to prevent the property market crash. But the government should have done that by supplying more homes – or promising to do so – instead of suppressing interest rates and increasing household debt. Populist economic policies force the nation to pay far higher prices later.
Yoon might legitimately feel anger toward financial monopolies and oligopolies. But he should rectify them through institutional means. For instance, Yoon can induce the enactment of laws that would obligate banks to allocate part of excess profits to financing low-income families or to proper ESG management on behalf of cash-short small businesses.
Yoon’s top financial regulator, a former prosecutor, can twist the banks’ arms but not develop institutional devices.
The chief executive should replace the head of the Financial Supervisory Service with a financial expert.