[The Crisis of Korean Finance] Financial CEO: "Loans and Financial Support Only Postpone Insolvency, Not a Solution"

Survey of Financial Holding Chairpersons and Bank Presidents
Continued NIM Decline Amid Low Interest Rates Raises Concerns Over Financial Industry Foundations
Competition on a 'Tilted Field' Due to Aggressive Entry of Big Tech Companies
Need to Ease Administrative Regulations Such as Face-to-Face Transactions and Overlapping Supervision

The financial industry in 2020 stands at a crossroads of significant change. After several years of unprecedented prosperity, it now faces a critical test directly linked to survival. The spread of the novel coronavirus infection (COVID-19) has brought a crisis not only to the domestic market but also to global finance. It is predicted that the survival of domestic financial companies will depend on how they overcome this challenge. Additionally, with big tech companies like Naver and Kakao entering the financial industry backed by advanced technology, existing financial firms are expected to face unprecedented crises and moments of challenge. Asia Economy diagnoses the problems of the Korean financial industry as perceived by domestic financial company CEOs and explores solutions to overcome sector-specific crises in a five-part series.

[Asia Economy Reporter Kim Min-young] “Under the global economic recession and ultra-low interest rates, volatility in the financial market has increased, raising the risks in the financial industry. Moreover, with a large-scale release of market liquidity, the financial intermediation function has weakened, and competition has intensified due to the growth of fintech (finance + technology), creating the most challenging environment ever faced.” (Chairman of Financial Group A)

On the 17th, CEOs of financial institutions who participated in the Asia Economy survey clearly expressed their recognition that financial conditions are tougher than ever amid the acceleration of the global economic recession caused by the COVID-19 aftermath and the emergence of new competitors.

The advent of the ‘zero interest rate era’ inevitably leads to a reduction in traditional interest income. Therefore, strategies to expand digital businesses, as well as asset management (WM) including investment advisory, bancassurance, and funds, have now become essential. CEOs unanimously agreed that regulatory relaxation is the most urgent prerequisite to achieve this.

◆ An ‘unprecedented’ crisis is coming, with the possibility of domino defaults = CEOs focused on the simultaneous surge in household and corporate debt. Although government’s bold fiscal spending temporarily improved liquidity, there are concerns that this is an ‘optical illusion,’ and they foresee a high possibility of defaults among vulnerable groups in the future. The chairman of Financial Group B said, “Market risks due to increased uncertainty in the global financial market caused by intensified US-China conflicts and strengthened protectionism, as well as credit risks such as potential defaults of companies and small business owners facing liquidity crises due to the prolonged COVID-19 pandemic, are worrisome.”

Additionally, there was considerable concern that the foundation of the financial industry could be undermined if the net interest margin (NIM) continues to decline due to the structural low-interest-rate environment. The CEO of Commercial Bank C said, “There are concerns about profitability deterioration and worsening soundness caused by the sharp cut in the base interest rate.” Bank CEO D gave an honest answer regarding household debt. He diagnosed, “Government policy loans or financial support only delay the timing of defaults and cannot be a fundamental solution. If the economic recession prolongs, household debt defaults could emerge as a trigger.”

According to the Bank of Korea, corporate and household loans surged over the recent three months (March to May). As of the end of last month, the outstanding corporate loans in the banking sector reached 945.1 trillion won, and household loans reached 920.7 trillion won. While it is natural for corporate and household debt to increase as they engage in production and consumption activities, the scale of increase is excessively large. Corporate loans surged by about 62.6 trillion won in the last three months, and household loans increased by 19.5 trillion won despite financial authorities’ efforts to restrain them.

◆ Survival comes first... Regulatory relaxation is essential = Financial companies are focusing on measures for survival rather than chasing immediate profitability. They acknowledge that the era of earning money through interest rate spreads is over and are putting their lives on revitalizing non-interest income sectors such as corporate finance (IB), asset management, and WM in the securities field. However, their financial strength is weak compared to global financial firms that dominate these sectors.

The chairman of Financial Group E said, “Global business is pursuing entry strategies tailored to regional characteristics,” adding, “In advanced countries holding key currencies, we focus on fundraising, intermediation, and IB by utilizing extensive local financial networks.” Another financial group chairman said, “We are strengthening localization businesses centered on Southeast Asia, including Vietnam, Myanmar, and Cambodia, where growth potential is higher than in advanced countries.”

In particular, CEOs raised their voices that regulatory relaxation is urgent. The chairman of Financial Group F emphasized, “Regulations and ‘invisible administrative regulations’ in verbal form are blocking bold challenges by financial companies.”

He also said, “Big tech companies like Naver and Kakao are entering the financial industry with innovative services such as simple remittance, but existing financial companies are competing on a ‘tilted playing field’ due to differential regulations.”

Regarding the direction of regulations, one financial group chairman suggested, “As non-face-to-face transactions become more active, regulatory relaxation is needed in areas such as trusts, where face-to-face transactions are applied as a principle in financial transactions.” He also expressed, “In the supervisory regulatory system, as the scope of concurrent and incidental businesses expands and overlaps increase, it is necessary to seek a direction to regulate by function rather than by industry.”

Another CEO emphasized, “Financial companies should have maximum autonomy and take responsibility for product launch and sales so that if problems arise in product sales, the financial companies themselves can be held accountable.”

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