Financial Public Institutions to be Obligated to Maintain 'Financial Soundness'

People Power Party Lawmakers Propose Bill
Targeting National Policy Banks like Bank of Korea and Korea Development Bank and Government Department Operating Funds

[Asia Economy Reporter Kangwook Cho] A bill mandating the maintenance of financial soundness for financial public institutions and various funds has been proposed. This is based on the judgment that if these entities incur losses, the government’s compensation could deteriorate financial soundness and lead to moral hazard and lax management. The bill targets not only policy banks such as the Bank of Korea and the Korea Development Bank but also funds operated by government ministries including the Ministry of Strategy and Finance and the Financial Services Commission.

According to the National Assembly’s legislative information system and financial sector sources on the 21st, ten members of the People Power Party, including Representative Do-eup Kim, proposed an amendment on the 16th that stipulates in law that financial public institutions and various funds must strive to maintain financial soundness. The amendment covers a total of twenty items, including policy banks such as the Bank of Korea Act, Korea Development Bank Act, Export-Import Bank of Korea Act, and Small and Medium Business Bank Act, as well as funds managed by various government ministries and public institutions such as the Korea Housing Finance Corporation Act, Public Fund Management Fund, Public Fund Repayment Fund, and the Inter-Korean Cooperation Fund Act.

Under current law, if a financial public institution incurs losses in its settlement, it must cover them with reserves, and if reserves are insufficient, the government must compensate. For example, the Deposit Insurance Corporation can borrow funds from the Bank of Korea when necessary to carry out deposit insurance payments, resolve insolvent financial companies, and disburse funds to the Deposit Insurance Fund Repayment Fund, with the government guaranteeing the repayment of principal and interest on such borrowings. In the case of policy banks like the Bank of Korea or the Korea Development Bank, if reserves are insufficient, the government compensates according to the National Finance Act.

However, concerns have been raised that government loss-sharing could worsen their financial soundness and cause moral hazard and lax management. In fact, the financial soundness of financial public institutions has been a continuous subject of debate. Especially with the expansion of real economy support by policy financial institutions due to the impact of COVID-19, concerns about deteriorating financial soundness have increased. During this year’s national audit, the Korea Credit Guarantee Fund was criticized for insolvency related to small business financial support, and the lax management of affiliated institutions under the Financial Services Commission was also scrutinized. The government plans to expand policy financial supply to nearly 500 trillion won next year and continue supporting the real sector to boost economic vitality.

According to Alio, a public institution disclosure system, as of the end of last year, the debt of public enterprises reached 388.1 trillion won, quasi-governmental agencies 119.7 trillion won, and other public institutions 17.3 trillion won, exceeding 520 trillion won in total. The debt scale has been increasing from 495.2 trillion won in 2017 to 503.7 trillion won in 2018 and 525.1 trillion won in 2019.

On the other hand, net income has been decreasing every year. The total net income of public institutions dropped by half from 15.4 trillion won in 2016 to 7.2 trillion won in 2017, falling below 1 trillion won to about 700 billion won in 2018. Last year, it recorded 600 billion won. Among public institutions, the net income of public enterprises plummeted from 9 trillion won to 1.4 trillion won during the same period.

A financial sector official said, "Recently, as financial policy institutions have undertaken large-scale financial support, concerns about problems in financial structure soundness are increasing," adding, "If the recovery of the real economy is delayed, the possibility of insolvency, especially centered on the sharply increased corporate loans, may grow, and if the financial support measures extended until March next year are terminated later, the soundness indicators could deteriorate."

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