[Viewpoint] How to Restore Balance to Korea's Skewed Financial Sector

Professor Kim Hong-beom, Department of Economics, Gyeongsang National University

Mark Twain, the 19th-century American literary giant who wrote 'The Adventures of Tom Sawyer,' succeeded as a writer and amassed great wealth, but he went bankrupt in subsequent business ventures. To him, a banker was "someone who lends you an umbrella when the sun is shining but asks for it back as soon as it starts raining." This is a sharp and poignant satire born from painful experience.

Perhaps because of this, as the world became harder to live in due to global crises, financial authorities (the Financial Services Commission and the Financial Supervisory Service) have long advocated for "warm finance" to support the welfare of ordinary people. The intention is good. However, no matter how warm the finance is, the financial principle of rational differentiation in loan interest rates and limits based on the borrower's credit rating and income cannot be ignored. Violating this principle can lead to great disasters.

For example, in the early to mid-2000s in the United States, low-interest mortgage loans were excessively issued without much consideration of borrowers' credit or income, as part of welfare for ordinary people. At that time, American society was entirely focused on the political slogan that "everyone has the right to quality housing." But when the ever-rising housing prices suddenly faltered in mid-2007, panic spread rapidly. This is how the subprime mortgage crisis came about.

Recently, there have been reports that the interest rates on unsecured loans for high-credit professionals have reversed with those for low-credit ordinary people. This is due to financial authorities' regulations aimed at curbing the rapid increase in unsecured loans caused by 'all-in borrowing' and 'debt investment,' which since the second half of last year have been focused only on professionals. This is an example of financial principles being undermined by arbitrary intervention from authorities.

The political sphere, heavily armed with the justification of helping industries, classes, and citizens harmed by the prolonged social distancing, is also problematic. It pays no heed to price stability, financial stability, macroeconomic stability, or fiscal rules. If the so-called 'win-win bills' related to profit sharing, loss compensation, and solidarity funds currently under review in the National Assembly all pass, the financial sector will have to provide funds for various newly established funds. Such changes in conditions will distort financial companies' profit strategies, ultimately damaging financial principles and disrupting the overall financial order. The Bank of Korea will also be burdened with obligations contrary to its core duties, such as direct purchases of government bonds for loss compensation and contributions to the win-win cooperation solidarity fund.

In short, Korean finance has lost its balance in financial principles and has become skewed. If this continues, the degree will worsen. This is because finance is increasingly regarded as an active redistribution tool for the welfare of ordinary people, leading to misuse. Even now, financial authorities must take the lead in setting finance straight. To do so, the authorities must first face two facts.

First, the 'microfinance' that financial authorities have actively promoted under the banner of consumer protection is merely welfare for ordinary people dressed in financial clothing, and is not truly 'consumer protection.' Generally, financial consumers have inferior financial literacy and bargaining power compared to financial companies, their transaction counterparts, and often exhibit irrational decision-making tendencies. This is the real reason consumers need protection. Welfare for ordinary people should rightly be the responsibility of fiscal authorities (the Ministry of Economy and Finance), not financial authorities.

Second, political capture of financial authorities has deepened over the past several years. This is due to the poor governance structure of current supervision. The Financial Services Commission, which oversees both financial (industry) policy and financial supervision, is vulnerable to conflicts of interest, and under the current dual structure with the head (Financial Services Commission) and the body (Financial Supervisory Service) separated, supervisory independence and accountability are hard to expect. Reform of supervision is urgent.

[Kim Hongbeom, Professor of Economics, Gyeongsang National University]

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