Confrontation between Government and Banks Escalates

An urgently called breakfast gathering of presidents of Korean domestic banks on June 22 ended with disagreement and aggravated tensions.

At the heart of the dispute is the government’s recent announcement on June 20 of its policy to extract $7.3 billion in contributions from local banks under the banner of a market stability fund. The money will go to create a fund to finance the purchase of bonds previously issued by companies to resolve their financial difficulties. These bonds which are currently finding few buyers, prompting the government‘s intervention.

At the breakfast gathering on June 22, an official from the the Financial Supervisory Service (FSS) displayed a confident attitude, saying, “We have received confirmation from local banks that they will send the money within the deadline.” Meanwhile, however, a bank president rebuffed this statement, saying, “We have received the request from the government, but the amount the FSS has solicited has raised many points of dispute. It will be difficult to make this payment.”

The FSS explained, “Banks, and in particular the relatively healthy banks, responded positively when the government asked for their assistance in tackling these financial jitters.” He added that the fund created from the banks’ contributions will be activated on July 1.

However, other bank presidents were also noncommittal: “We have only heard about the plan from the FSS. We haven’t promised anything.”

Bank presidents complain that the government request has left them in an impasse. Banks would have to shoulder a maximum contribution of a massive 1 billion won ($900 million) each. The presidents are loathe to commit to this undertaking alone, and complain that there is no guarantee of the return of the funds. While presidents are not required to receive approval for the contribution from their directors or shareholders - because the contributions are classed as investments - they are still conscious that their actions are being scrutinized by directors and shareholders.

Worried and frustrated, a local bank president said, “Prior to the end of the fiscal year in June, the government was pushing us to save funds as a kind of incurance in the event of financial losses. Now, government is forcing us to allocate money to the resolution of other companies’ financial difficulties. We don’t know what to do about it.”

This conflict reflects the current situation in the domestic financial sector, where quick-fix solutions are hastily created for constantly shifting situations. While the government urges banks to lend support to short-term initiatives, banks feel compelled to defend their own security and interests. The two sides seem to play endless games, where the government gives orders which the banks resist.

Amid this tension and distrust between banks and government, companies which expected government-initiated measures to salvage them from bankruptcy are instead facing a serious lack of liquidity. The government has to tackle this matter with intelligence and a clear view of the long term.

by Shin Ye-ri