[Column] Profit vs. public obligations

Without striking a delicate balance between profit and public role of commercial banks, the boom-bust cycle will only repeat itself.

Suh Kyoung-ho

The author is an editorial writer of the JoongAng Ilbo. The big five Korean lenders before the Asian financial crisis were Choheung Bank, Commercial Bank, Korea First Bank, Hanil Bank and Seoul Bank. New names Shinhan, KorAm and Korea Exchange joined in the 1990s. By the end of 1997, commercial banks numbered at 16. Over the three decades of the industrialization period, banks were under tight government supervision. Ministry of Finance and Economy (MOFE) officials wielded mighty power, called the “Mofia.” Bank heads and executives shook at the call of a junior official of the MOFE financial policy and industrial policy bureaus. The government named the managers even without a single share in the banks.

But after the financial crisis that resulted in a bailout from the International Monetary Fund (IMF), banks also came to fall. As profitability became important, commercial banks no longer should require a bailout with tax funds. In official government data, financial institutions were referred to as “financial companies” from 2001. Following the 2008 global financial crisis, financial company privatized profits by indulging their employees with fat bonuses during boom years and socialized losses during crisis by receiving massive bailouts.

The big four financial holding companies reaped a combined net profit of 50 trillion won ($39 billion), of which 40 trillion won was made off income from higher interest rates. The massive profit was nothing to be proud of, as it primarily owed to rate hikes by the central bank. Still, banks went on to enjoy a bonus party and doled out extravagant severance pay to early retirees.

Government control over interest rates went against the market principles, but nevertheless was chosen to compensate for monetary tightening. The Bank of Korea had to go on raising the base rate to prevent capital flight from the faster rises in U.S. rates and to tame inflation. But the government could not neglect hardships of borrowers when household debt had reached 1,800 trillion won after a lengthy loose period. But experts like Kang Kyung-hoon, a professor at Dongguk University, warned about the side effects if the makeshift intervention goes on.

Since President Yoon Suk Yeol’s description of commercial banks as “public assets,” Financial Supervisory Service (FSS) Governor Lee Bok-hyun has lashed out at the banks, calling them “exploitive” and frowning at the 10 trillion won those banks hurriedly packaged as social contribution over the next three years.

Instead of explicit verbal intervention, financial authorities must deliberate on devising better policies. It would be more effective for the authorities to encourage banks to boost open banking, disclose rate levels of banks and make it easier for their clients to move to other bank accounts.

Lee Bok-hyun, Financial Supervisory Service (FSS) chief, delivers a speech about the financial watchdog’s diagnosis on big tech’s advance into the financial sector and challenges expected from the entry, on Feb. 17. [YONHAP]

Since banks most fear the big-tech’s entry into the financial sector, financial authorities must present a new frame of regulation going beyond the rigid separation of industrial capital and financial capital. Unless the financial authorities widen the business spectrum of digital banks, traditional lenders will not worry about another addition of internet or mobile players. Instead of hosting golf competitions as social contribution, commercial banks must compete over debt relief or other inclusive programs for the weaker class to meet their social responsibility.

Banks indeed have a public role as they do business through the money entrusted by their customers more than the capital from shareholders. They cannot be entirely left onto the market as their bust could shake the entire banking system. They have a duty to protect their clients from mis-selling and discriminatory practices. This is why they fall under scores of regulations.

But the president is misleading the public by calling commercial banks “public assets.” Public assets are provided free like military defense and security services. Individual usage does not hamper with other individual’s use. Commercial banks do not fall under the public asset category. Economics class could ask if banks should be considered “public assets” in tests and could present Yoon’s remarks as an example.

Now the banks are pressed with social responsibility again. Bank stability should not be undermined due to the financial authorities’ stronger emphasis on their public role. Without striking a delicate balance between profit and public role, the boom-bust cycle will only repeat itself.