[Change the Flow of Capital]⑦"Limits of Loan Expansion... Productive Finance Must Shift to Investment-Centered Approach"

Household Lending Concentration and Capital Regulation Shackle Banks
Banks Must Change Their Risk-Averse Survival Structure
Simple Loan Expansion, as in Creative and Green Finance, Repeats Past Failures
Urgent Need to Foster a Virtuous Cycl

Experts unanimously agree that in order for productive finance to take root, it is necessary to go beyond simply expanding funding and fundamentally transform the structure of the entire financial system. They point out that if the current approach of merely "expanding loans" continues, we will inevitably repeat the limitations faced by past initiatives such as creative finance and green finance. The suggestion is to shift the focus of policy from the issue of "where to allocate money" to the design of a system that determines "how money should flow."

Banks Tied Down by Regulation: The Structure Where Risk Aversion Is a Survival Strategy Must Change

Donghyun Ahn, professor of economics at Seoul National University, stated on April 29, "In the past, 80 to 90 percent of bank loans were corporate loans, but after the 1997 foreign exchange crisis, due to strengthened regulations and policy changes, the share of household loans has now risen to over 70 percent." He explained, "Banks' focus on household loans over corporate loans is not simply about profits, but rather the result of the current regulatory and supervisory framework guiding them in that direction."

The problem is that this conservative structure conflicts with the expansion of productive finance. If a corporate loan goes bad, the bank is held responsible for screening and faces strict penalties, but even if a company grows significantly, the bank's additional profits are limited. As a result, banks inevitably adopt a decision-making structure that prioritizes loss avoidance over profit expansion. Yongjin Kim, professor of business administration at Sogang University, also analyzed, "Since commercial banks place top priority on soundness management, it is inevitable that they prefer safer personal loans over riskier corporate loans."

There is a view that excessive regulation must first be eased in order to break this practice. Professor Ahn pointed out, "With excessive application of regulations such as the Bank for International Settlements (BIS) capital adequacy ratio and liquidity requirements, banks are essentially unable to act." He added, "At the end of the year, when regulatory ratio limits are reached and corporate funding demand surges, banks repeatedly find themselves unable to supply loans." He emphasized the need to ease some of the capital ratio and risk-weighted asset (RW) regulations to give banks more leeway in their operations.

"Loans Are Just Debt"... An Urgent Need to Build an Investment-Centered Ecosystem

Jiyong Seo, professor of business administration at Sangmyung University, suggested that in order to supplement the structural limitations of banks, policy finance should play a "priming role" by bearing the initial risk and attracting private capital. He said, "Policy finance should proactively take on risk, with private capital following in afterward," and emphasized, "Not only advanced industries, but also venture scaling-up and regional innovation require the all-around supply of risk capital."

Past green finance and creative finance initiatives are positively evaluated for pioneering new areas—climate finance and venture finance—and establishing infrastructure. Green finance laid the foundation for climate-related finance through the introduction of the emissions trading scheme and the formation of the green bond market, while creative finance expanded the venture and startup finance ecosystem by establishing startup support infrastructure such as the Creative Economy Innovation Center and D.CAMP. An official from the Financial Services Commission explained, "Green finance and creative finance are meaningful not as completed policies, but because they created new financial domains. They played a certain role by forming related systems, markets, and infrastructure." However, the prevailing assessment is that as the focus shifted to loan expansion, there were clear limitations in shifting the method of capital supply itself toward "investment."

Currently, productive finance being promoted is a concept that is one step further than previous policies. It is an attempt to change the flow of funds across the entire financial system, rather than simply allocating funds to specific industries. Experts agree that, learning from past limitations, the focus should be on shifting the method of capital supply from loans to investment.

Professor Kim commented, "Both technology finance and green finance ultimately just increased loans to companies in specific sectors," and added, "It is a repeated pattern of supplying funds through banks in a situation where the capital market is underdeveloped." He identified a weak capital market and a bank-centered financial structure as the causes of these structural limitations. Professor Kim pointed out, "Looking at Korea's exit market, more than 90 percent is through initial public offerings (IPOs), while mergers and acquisitions (M&A) are minimal, resulting in a structure where investment capital cannot circulate." Therefore, he argued that improvements to the capital market system must proceed in parallel. Specifically, he said it is necessary to diversify the IPO-centered exit structure, expand M&A routes, and relax regulations to activate investment vehicles such as Business Development Companies (BDCs), thereby encouraging a virtuous cycle of investment capital.

A Pan-Government Control Tower Must Be Established, with Focus on 'Quality Over Speed'

Korea, due to the constraints of national debt and fiscal capacity, is in an environment where it is difficult to implement large-scale subsidy policies like China. Therefore, there is a growing call for a strong control tower to efficiently manage dispersed policy funds. Professor Ahn said, "Since policy finance funds are already abundant, including Korea Development Bank, Export-Import Bank of Korea, IBK (Industrial Bank of Korea), the Fund of Funds, and the Growth Finance, it is desirable to coordinate them integrally and then provide additional funding as needed. Currently, there is a lack of a basic blueprint for funding structure, investment portfolios, and risk allocation methods," he pointed out.

There have also been repeated warnings that the government must not become fixated on performance indicators or the scale of funds—mere "numbers." Jinyoung Shin, professor at Yonsei University School of Business, advised, "Setting a target amount and adopting a record-accumulation approach to investment leads to a high probability of failure. A system of strict selection of investment targets and long-term management, in cooperation with the private sector, is necessary." Seokki Kim, senior research fellow at the Korea Institute of Finance, also emphasized, "If you rush to execute funds for short-term results, investment efficiency falls. A sophisticated approach that prioritizes the quality of investment over speed is needed."

Editor's NoteThe Lee Jaemyung administration has declared a major shift toward "productive finance." The core of this policy is to redirect capital that has been concentrated in real estate toward advanced and strategic industries. As the global competition for technological supremacy expands into a "capital war," the United States, China, Japan, and Europe are pouring astronomical amounts of national and private finance into strategic industries. In contrast, Korea's financial system remains stuck in a conservative structure centered on real estate collateral loans. There are growing concerns that continued distortion in resource allocation could cause Korea to fall behind in technological competition. To address this, the government has launched the 150 trillion won "National Growth Fund," combining policy finance and private finance, to initiate structural transformation. This article examines the necessity of productive finance, the limitations of private finance, and the policy challenges that lie ahead.

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