[Interview with Ruling and Opposition Financial Chiefs] Kim Byung-wook "Need to Reconsider Financial and Industrial Separation"

Consumer Damage Dispute Resolution Results: Consumer Consent Limits to 20 Million KRW
Financial Firms-Big Tech Must Correct Uneven Playing Field
"Finance Is Not Just" Statement Emphasizes Role of Policy Finance

[Interview = Jeong Jae-hyung, Head of Finance Department, Summary = Reporter Shim Na-young] Kim Byung-wook, a member of the National Assembly who serves as the financial strategist and head of the occupational division at Lee Jae-myung’s Democratic Party presidential campaign, said, "I hope we have an opportunity to reconsider the entire regulation of the separation of banking and commerce (Geumsan Separation)," adding, "Side effects like conglomerates turning into private treasuries can be prevented through behavioral regulations such as prohibiting loans and guarantees to major shareholders’ special related parties and affiliates."

In an interview with Asia Economy on the 25th of last month, Kim responded to the criticism that "financial companies are not allowed to hold more than 15% of shares in non-financial companies, which creates discrimination between financial companies and big tech firms like internet banks, i.e., a tilted playing field." He further explained, "Big tech and others were given regulatory relief initially for innovation, but ultimately, the principle of same function, same regulation should be applied to ensure fair competition."

Regarding consumer protection and the pledge to allow "unilateral binding force" where the Financial Supervisory Service’s Dispute Mediation Committee’s decision becomes final if the consumer agrees, Kim stated, "If allowed without limit, it would fundamentally nullify the financial companies’ right to sue, so we propose applying it only up to consumer damages of 20 million KRW," adding, "Amounts beyond that should be disputed through litigation."

On cases where minority shareholders suffer losses due to physical division (muljeok bunhal), he suggested, "We should not infringe on minority shareholders’ interests by giving stock purchase rights to those opposing physical division so that major shareholders buy the shares, or by granting subsidiary new stock subscription rights to minority shareholders of the parent company."

The following is a Q&A.

Kim Byung-wook, Head of the Functional Headquarters of the Democratic Party of Korea's Presidential Campaign Committee. / Photo by Yoon Dong-joo doso7@

- I am curious about candidate Lee Jae-myung’s economic philosophy. The candidate said, “Economy is politics,” and “Finance is not just.”

▲ Saying finance is not just means that the proportion of asset income is increasing while earned income is not keeping pace with asset income. In short, in capitalism, the gap between those who benefit from finance and those who do not is widening. In asset markets such as virtual assets, real estate, and stocks, especially real estate, wealth is formed by leveraging finance. Those who cannot do this live solely on earned income. These factors widen the gap. As a politician, I have a sense of problem and concern about finance. Finance is the most important infrastructure supporting the real economy. How we structure the financial framework determines the direction of the Korean economy.

People with high credit receive more financial benefits as a basic principle. I do not want to deny that itself, but even low-credit individuals should be helped to receive financial benefits. Because there are institutional limits on the private side, policy financial institutions must play a role. For personal credit, there are the Credit Recovery Committee and the Korea Inclusive Finance Agency. On the corporate side, there are the Korea Credit Guarantee Fund and the Korea Technology Finance Corporation. Policy finance’s role is to fully manage care for those who do not benefit from finance. Especially, the future role of the Korea Inclusive Finance Agency will grow. The basic loan is also a pledge in that direction.

- There is criticism that the statement "high-credit borrowers have low interest rates, and low-credit borrowers have high interest rates" contradicts market principles.

▲ To solve this problem in private finance would contradict market logic. While respecting that awareness, I say that it would have side effects if solved in the private sector, so it should be addressed by policy finance.

- There is also a youth basic loan pledge to provide ultra-low interest long-term loans up to 10 million KRW, prioritizing youth.

▲ The youth basic loan is misunderstood. It does not cause moral hazard or bank insolvency. It is the same as the Korea Credit Guarantee Fund lending to companies. The Korea Credit Guarantee Fund provides guarantees, and companies use the guarantee certificates to get loans from banks and spend the money. If the company cannot repay, the bank demands repayment from the guarantor, and the guarantor pays the bank. It is unrelated to bank insolvency. Rather, banks earn some profit sitting back.

The youth basic loan allows young people aged 19 to 34 to receive a 10 million KRW guarantee certificate from the Korea Inclusive Finance Agency, then use it to get a loan from a bank and spend the money themselves. The loan purpose will be disclosed. The goal is to prevent use for non-productive purposes like luxury or indulgence. If the youth cannot repay, the bank demands money from the Korea Inclusive Finance Agency. The agency calculates the guarantee multiple based on statistical experience and only guarantees amounts unlikely to be repaid. The government supports the funds needed for the guarantee.

Currently, the Sunshine Loan is operated with a relatively high interest rate but low default rate. The youth loan interest rate is expected to be around 3%, lower than Sunshine Loan. I think about 10% might be lost, but this is a conservative estimate. Others say 5% or 3%. Moral hazard will be less than expected. Do you think youth will recklessly waste 10 million KRW? Even part-time jobs earn 1 to 2 million KRW per month. Don’t underestimate our youth. If you understand the meaning of credit in life and how difficult it is when credit is downgraded, the idea that youth loans cause bank insolvency is nonsense. When the government is willing to provide 10 million KRW, the effect of money circulating in the domestic market should be considered. There is a multiplier effect and tax recovery. Calculating these, government support is not negative.

- The opposition party says it should be called welfare, not a loan, because it does not have to be repaid.

▲ While it does not have to be repaid, it leaves a scratch on the credit rating. It is not unrelated to credit rating. If not repaid, it is a minus for the individual. It becomes difficult to get a job. Education on responsibility when borrowing money and the meaning of non-repayment should be thorough.

- To allow low-credit borrowers to borrow money, shouldn’t the DSR (Debt Service Ratio) regulation be eased?

▲ It is a concern. While worrying about the increase in national debt, a bigger worry is household debt. Advanced countries saw national debt rise during COVID but household debt did not increase, but Korea is different. I fundamentally agree with financial authorities’ point that household debt needs to be managed within a certain total amount. However, if all real demand borrowers such as those needing student loans, jeonse deposits, or hospital bills are uniformly controlled, pain always follows. The Financial Services Commission said it would create exceptions for such real demand borrowers.

- Are exceptions not applied when buying a house?

▲ Candidate Lee pledged to provide loans with an LTV (Loan to Value ratio) of 90% for first-time homebuyers and youth. Banks will autonomously assess repayment ability. There are objections about what if house prices fall, but it means maximizing the loan amount. Whether to lend or not is the bank’s judgment. Economic conditions, real estate market outlook, and responsible lending by banks require careful management.

Kim Byung-wook, Head of the Functional Headquarters of the Democratic Party of Korea's Presidential Campaign Committee. / Photo by Yoon Dong-joo doso7@

- You pledged to lower the legal maximum interest rate of 20% per annum.

▲ It was removed from candidate Lee’s final official pledge. In times of rapid interest rate hikes like now, lowering the legal maximum interest rate is realistically difficult. However, working in the Political Affairs Committee overseeing the Financial Services Commission, I wonder who can survive paying 20-30% interest. Loans are meant for rehabilitation, but if high interest continues, it is hard to escape. Realistically, lowering the maximum interest rate causes a crowding-out effect pushing borrowers to illegal loan markets. Still, we cannot completely rule out lowering the maximum interest rate. We need to check data on the proportion moving to illegal loan markets.

In the past, lowering the legal maximum interest rate did not reduce financial companies’ profits. Loan companies prefer borrowers to repay with lower interest than to lose money. Nevertheless, with interest rates rising, it is difficult to explicitly state what the maximum interest rate should be. It was a controversial issue internally.

- You pledged unilateral binding force for consumer protection, but isn’t it difficult for financial companies?

▲ For Dispute Mediation Committee decisions, financial institutions can object and the committee conducts administrative review. In administrative litigation, financial institutions have a superior position over consumers because money can settle the matter. There is such awareness. It takes too long for consumers to benefit from the committee’s decision, so it is meaningless to consumers. Therefore, if consumers agree to the committee’s decision, it should be finalized regardless of financial companies’ consent.

However, unlimited expansion of this could fundamentally nullify the constitutional right to sue. Allowing unilateral binding force with a limit on the amount is reasonable. Applying it to all amounts would ignore lawsuits. We propose applying it only up to consumer damages of 20 million KRW. The smaller the damage, the less incentive to sue and the higher the litigation cost. Larger amounts should be disputed through litigation. The committee must be independently authorized and trusted. The committee’s composition and role must be well managed to gain trust.

- A recent issue for financial companies is fair competition with big tech. Big tech’s entry into finance causes information asymmetry. Non-financial companies can engage in finance, but financial companies find it hard to enter non-financial sectors, causing dissatisfaction.

▲ We have much to study on this. That is why we are discussing the Electronic Financial Transactions Act and the Online Platform Act. Existing companies say "reverse discrimination" and "only big tech is favored," so we need to listen. In the Political Affairs Committee, innovation focuses more on emerging businesses than existing ones. Emerging industries lead innovation, create added value, and new jobs. Regulatory sandboxes exempt existing regulations to accelerate innovation. Existing industries are marginalized and investors avoid them.

The relationship between big tech and existing financial companies is similar. We agree on the necessity of big tech centered on platforms. Big tech was supported with social consensus or tacit approval. Now financial companies complain. We need to review applying the same regulation to the same activities. It is not about banking, insurance, or cards, but about lending. It is time to comprehensively check if the same regulations apply by industry.

- Shouldn’t the regulation preventing financial companies from owning more than 15% of non-financial companies’ shares be eased?

▲ It is too early to discuss, but in 2018, the Internet Specialized Bank Act allowed ICT companies to own up to 34% of banks. Separation of banking and commerce (Geumsan Separation) is not a sacred rule. There was much debate within the party. Still, Kakao Bank is considered decent. It brought a kind of "catfish effect" to people in their 20s and 30s, accelerating banking innovation. A regret is that Kakao Bank said it would provide many mid-interest loans but mostly lends to high-credit borrowers. There is an argument that it is difficult to take risks in early corporate stages, but criticism is warranted.

Rather than strictly adhering to the Geumsan Separation principle, side effects can be resolved through specific behavioral regulations. Laws can prohibit loans or guarantees to special related parties and corporate loans. Relaxing Geumsan Separation and preventing side effects through behavioral regulations is preferable. I hope we have an opportunity to reconsider the entire Geumsan Separation regulation. It would be good to expand the scope within which companies can enter.

Kim Byung-wook, Head of the Functional Headquarters of the Democratic Party of Korea's Presidential Campaign Committee. / Photo by Yoon Dong-joo doso7@

- You set a goal of KOSPI 5000. It is not achievable by government policy alone. Economic cycles and global liquidity must support it. Some worry it is set too high.

▲ I don’t think it is too high. There are many factors discounting the domestic stock market. Every time incidents like the Kim Geon-hee stock manipulation case occur, market trust falls. Beyond information asymmetry, collusion exploiting information asymmetry happens. If it happens occasionally, who would enter the market? Korea has a much higher proportion of individual investors than other countries. Stock manipulation and market manipulation must disappear because individual investors support the market. Second is governance. It has improved compared to before. Physical division ignoring minority shareholders and infringing their interests is happening. Such physical division will be practically banned. Physical division can proceed but minority shareholders must be consulted. Dividend payout ratios, which have been low, must be increased.

There are structural market problems. To broaden the demand base, the candidate mentioned inclusion in the MSCI (Morgan Stanley Capital International) developed market index. About 60 trillion KRW of new capital should enter our stock market. Although the National Pension Service and other pension funds have limits, they can raise KOSPI. Mid- to long-term investors depend on government tax and incentive policies. The pledge to apply low-rate separate taxation on dividends for minority shareholders is also included. From July this year, the default option for retirement pensions (allowing financial companies to manage pensions based on a default setting by subscribers) will be introduced. Expanding the profit base and shifting idle funds to the capital market is necessary. Incentives can induce money movement.

- You said minority shareholders suffer when stocks undergo physical division. How can such damage be reduced?

▲ Currently, physical division is decided by the parent company’s board and shareholders’ meeting without consulting minority shareholders. We can propose giving minority shareholders the right to subscribe to new shares of the subsidiary. For those opposing physical division, a stock purchase right can be granted so major shareholders buy their shares. Legal and institutional improvements are needed. When LG Chem spun off its battery business to create LG Energy Solution, the subsidiary’s market cap became several times that of the parent, which even analysts cannot explain. Such market cap formation is theoretically inexplicable. Previously, there was a large gap between common and preferred stocks because preferred stocks paid higher dividends. Eventually, preferred stock prices caught up, but it was a bubble. We have many concerns about physical division. When subsidiaries separate and parent company shareholders hold subsidiary shares, it is a win-win. But if subsidiary shares are not given, the parent’s stock price falls while the subsidiary’s rises several times, it is clearly unfair.

- Commercial banks posted record profits and held bonus and dividend celebrations. What is your view?

▲ I do not want to criticize private companies giving bonuses, but banks should focus more on building reserves. After COVID, loan and interest repayment deferrals for small business owners lowered delinquency rates. At times like this, careful analysis of potential loan defaults is necessary.

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