Banks may have to cough up $1.4 billion in 'windfall tax'

ATMs are being used by customers in downtown Seoul in this file photo. Newsis

Local commercial lenders are coming under increasing pressure to cough up about 1.9 trillion won ($1.4 billion) for a “windfall tax,” which the main opposition Democratic Party of Korea (DPK), seeks to impose on interest income generated almost exclusively as a consequence of rapid central bank key rate hikes over the past few years.

Rep. Kim Sung-ju of the main opposition DPK introduced a bill, Tuesday, whereby up to 40 percent of a bank's net interest income exceeding 120 percent of the past five years' average would be sourced for a fund. The “contribution” will be used to promote mutual growth with socially vulnerable groups including low-income earners, the disabled and the elderly.

The National Assembly National Policy Committee member said the legislative bill coincides with a global wave of instituting a similar system.

“The U.K., Spain, Italy and the U.S. have introduced or are seeking to introduce a windfall tax,” he said during a party meeting at the National Assembly in Yeouido, Seoul.

"Korea also needs to lay the groundwork for financial companies to return their excess profits back to society.”

The legislative move, in his view, is a surer way of permanently resolving the issue that repeats every so often.

“The National Assembly instituting the move is a more rational and sustainable way to approach and solve the problem, much better than the government having to force financial firms to make contributions every time a similar issue is brought to public attention.”

During the 1997 financial crisis, the government injected taxpayer money to help financial companies restructure, sparing them from bankruptcy, in his view, but they have made no meaningful contributions to society. Also questionable is their innovative efforts.

“Banks were able to generate enormous profits not because of technological advances but because of interest rate hikes,” he said.

The comment is in line with Financial Supervisory Service (FSS) Governor Lee Bok-hyun, who criticized the banks last week for lacking innovation compared to Samsung Electronics and Hyundai Motor.

Heads of the country’s top financial groups — Shinhan, KB, Woori, Hana and NH — will meet Lee and Financial Services Commission Chairman Kim Joo-hyun, Thursday.

According to FSS data, the local banks’ net interest income averaged 42.5 trillion won between 2018 and 2022. The figure for the first six months came to 28.5 trillion won, likely raising the year’s figure to about 57 trillion won.