Concerns Over 'Smooth Passage Legislation' for Dual Regulation and Individual Company Targeting Laws

Profitability Decline and Increased Risk of Insolvency Due to COVID-19 and Zero Interest Rates
Potential Deterioration of Financial Health Amid Regulatory-Focused Legislation

[Asia Economy Reporter Kim Hyo-jin] Various financial regulatory legislations being promoted simultaneously by the political sphere and government with the opening of the 21st National Assembly are pointed out to impose a significant burden on the already contracted financial sector due to the aftermath of the novel coronavirus disease (COVID-19) and the advent of the 'zero interest rate' era.

Concerns are growing as the government’s policy, which places greater emphasis on control rather than fostering finance, is visibly supported by the ruling party’s force. Amid worsening profitability indicators centered on the banking sector, if the possibility of accumulating insolvency due to COVID-19 materializes, the overall financial sector’s health is expected to deteriorate rapidly. Some legislations promoted under the pretext of protecting financial consumers are also feared to push financially vulnerable groups into blind spots.

◆ "Pressure Intensified by Dual Regulation" = The Financial Group Supervision Act draft, which controls six non-bank financial groups including Samsung, Hanwha, Mirae Asset, Hyundai Motor, Kyobo, and DB, is increasingly likely to be legislated despite controversy over it being a dual regulation that strengthens supervision not only over financial sectors but also over entire financial groups. The purpose is to prevent risks within groups from transferring to the financial sector, as seen in the 2013 Dongyang incident, but it results in scrutinizing the overall management status of the groups under a microscope, which is expected to exert considerable pressure on these financial groups.

By requiring additional capital reserves based on evaluations of group-level risks such as the impact of internal transactions and risk concentration on financial group soundness and the possibility of risk transfer from affiliates, and allowing financial authorities to order submission and implementation of management improvement plans if capital adequacy ratios or risk management evaluations fail to meet certain standards, it is analyzed that the government creates room for direct intervention in financial group management.

A financial sector official said, "In various decision-making processes for investment or management efficiency, concerns about legality must be resolved first," adding, "The overall management stance will shift to a very defensive posture." There is also speculation that such movements could give momentum to regulatory legislations targeting individual companies, like the 'Samsung Life Insurance Act' proposed in the ruling party. Another financial sector official pointed out, "If the almost automatic flow of regulatory legislation based on a sense of righteousness intensifies, it will be very difficult to correct problems later."

A representative example is the amendment to the Interest Rate Restriction Act proposed by the ruling party. It lowers the statutory maximum interest rate from 24% per annum to 20% and prohibits total interest from exceeding the principal. If the maximum interest rate decreases, financially vulnerable groups relying on loan businesses at the lower end of the formal financial sector are highly likely to quickly shift to illegal private loans.

◆ Financial Profitability Continues to Deteriorate... Concerns Over 'COVID Insolvency' Amplify = The problem is that the financial sector’s profit structure is worsening while it must also bear political risks. Due to ultra-low interest rates and massive financial support for companies affected by COVID-19, financial companies are concerned that the crisis will intensify from the second half of this year.

According to the Financial Supervisory Service, the net interest margin (NIM), a representative indicator of bank profitability, recorded an all-time low of 1.46% in the first quarter. During the same period, banks’ net profit was 3.2 trillion won, down 700 billion won (17.8%) from 4 trillion won in the first quarter of last year. The banks’ return on assets (ROA) was 0.48%, and return on equity (ROE) was 6.29%, down 0.15 percentage points and 1.70 percentage points respectively compared to the same period last year.

The delinquency rate, which evaluates the qualitative level of loan receivables, is also rising. At the end of April, the bank loan delinquency rate was 0.40%, up 0.01 percentage points from the end of the previous month. The delinquency rate for loans to small and medium-sized enterprises (SMEs), which are particularly vulnerable to COVID-19, rose by 0.04 percentage points to 0.57% compared to the end of the previous month. A representative from a commercial bank said, "Looking at the overall delinquency rate trend, the situation is holding up reasonably well," but added, "It is difficult to rule out the possibility that SME delinquencies will directly lead to long-term insolvency."

A senior official from another commercial bank expressed concern, saying, "It is time to ease existing regulations, but policies are being established and implemented too politically," and added, "Regulations are being imposed without considering the financial industry conditions, which are tougher than during the International Monetary Fund (IMF) crisis." The official further said, "When the government or National Assembly creates or amends regulatory bills, they often refer to and base them on cases from advanced foreign countries, but the financial management systems of advanced countries are not only about strict sanctions or penalties," adding, "We are neglecting a considerable level of autonomy and principles of autonomous competition that correspond to those systems."

This content was produced with the assistance of AI translation services.