[Song Seungseop's Financial Light] The 'Poison' Eating Away at Financial Companies... Daemabulsa

Finance is difficult. It is entangled with confusing terms and complex backstories. Sometimes, you need to learn dozens of concepts just to understand a single word. Yet, finance is important. To understand the philosophy of fund management and consistently follow the flow of money, a foundation of financial knowledge is essential. Accordingly, Asia Economy selects one financial term each week and explains it in very simple language. Even those who know nothing about finance can immediately understand these 'light' stories that turn on the 'light' of finance.

[Asia Economy Reporter Song Seung-seop] Do you know the term ‘Daemabulsa (大馬不死)’? In the game of Baduk (Go), stones that are widely connected are called ‘Daema’. Because Daema is large in size, there is a belief that it cannot be captured by the opponent’s attack, which is called Daemabulsa. In actual Baduk matches, there have been scenes where Daema, which was in danger, miraculously survived and became a turning point for a comeback. However, Daemabulsa is not only a Baduk term but also an economic term. It is especially a critical existence for large financial companies and a target for reform. Why is Daemabulsa a ‘poison’ for financial companies?

If a financial company holds the belief of Daemabulsa, it is highly likely to become insolvent in an instant. Large financial companies attract deposits from many customers, and this money is used for loans to customers and businesses. Because of their large size, it is easy to think, ‘We cannot go bankrupt, and if we get into trouble, the government will help us.’ This mindset often leads to moral hazard, where riskier and more profitable businesses are recklessly pursued rather than sound operations. Daemabulsa becomes the poison that destroys banks and companies.

Korea painfully realized how dangerous Daemabulsa was during the 1997 International Monetary Fund (IMF) foreign exchange crisis. On June 18, 1998, Lee Heon-jae, Chairman of the Financial Supervisory Commission, and Bae Chan-byeong, President of Commercial Bank, announced 55 companies targeted for liquidation. Included were 20 affiliates of the five major conglomerates, which were thought to be too big to fail.

The five major commercial banks in Korea at the time (Choheung, Commercial, Cheil, Hanil, and Seoul Trust Bank), which had lent money to these companies, all became insolvent and disappeared into history. Even as large companies accumulated massive debts and operated poorly, financial institutions continued to extend loans, increasing the risk of insolvency. Ultimately, the government had to inject astronomical amounts of public funds, raised through taxes and debt, to restructure the banks.

The economic crisis began in 2008 when the global major American financial firm Lehman Brothers went bankrupt.

The global financial crisis of 2008 was no different. The crisis began when Lehman Brothers, a major global financial firm in the United States, filed for bankruptcy. The cause was Wall Street’s risky management, which bundled bonds with different credit ratings in complex ways and sold them. Other financial firms also faced bankruptcy risks, and the economy was on the brink of collapse.

The U.S. government had to implement a trillion-dollar bailout. Large financial firms like Citigroup and the world’s largest insurer, AIG, received public funds. At the time, there was much criticism from the public and media. The criticism was that if the government rescues companies on the brink of bankruptcy due to risky management with taxpayers’ money, companies and management will believe even more firmly in Daemabulsa. Countries that injected public funds into banks needed to eliminate the ‘Daemabulsa’ belief held by companies in advance.

Since then, governments and global financial institutions have begun to guard against Daemabulsa. Discussions have started on how to reform the Daemabulsa entrenched in financial companies. In 2014, the IMF warned in its 'Global Financial Stability Report' that banks were still reinforcing the belief in Daemabulsa by implicitly receiving government subsidies. Last year, China strengthened regulations to prevent its financial authorities from injecting public funds into insolvent large financial institutions.

The operational pathway of the "too big to fail" reform presented at the 2009 G20 Summit. Photo by Financial Stability Board (FSB)

At the 2009 Pittsburgh G20 Summit, measures to solve the Daemabulsa problem were proposed. The main points were to strengthen soundness, management, and supervision, and to reform the resolution system. According to the ‘Daemabulsa Reform Evaluation Report’ published in the Financial Risk View recently released by the Korea Deposit Insurance Corporation, risk-seeking behavior by large financial companies has actually decreased. Jo Hyun-seok, a senior investigator at KDIC, mentioned, “Regulations for the additional implementation of domestic Daemabulsa reform should be considered in the medium to long term.”

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