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Make the Best of a Bad Plan

Published: 04 Jan. 2003, 19:33

On Wednesday, four banks － Hanvit, Peace, Kwangju and Cheju － that had applied for public funding were turned down by the Financial Supervisory Commission, which evaluated their plans for rehabilitation as inadequate to enable them to survive on their own. They are to be handed over to a government-led financial holding company scheduled to begin operations in February. This holding company will play a core role in the second financial restructuring, dealing with a multitude of problems that plague our domestic financial institutions, including huge amounts of nonperforming loans and very low productivity.

In spite of the importance of the role envisioned for the holding company, there are two things wrong about the establishment of this new entity: It goes against some basic principles and it is being done in cart-before-the-horse fashion.

Admittedly, a holding company is one way to cut back on excess staff and branch offices. Acting as a control tower for the financial institutions under it, a properly managed holding company can reorganize human resources for greater efficiency, sell or amalgamate unproductive branch offices and minimize duplicate expenditures for such equipment as computer systems. Nevertheless, liquidations and mergers would be a far better way to reduce such excesses. Rather than letting these banks suffer the consequences of their bad loans, the government is going against market principles by investing yet more of the taxpayers'' money to keep them going.

The order in which this plan is being carried out is also a problem. Before deciding to establish a holding company, the government should have determined exactly what functions it is to serve, thought out strategies and a vision for its future and carefully planned the details of its internal organization and the relationships between the institutions under its aegis. Instead, the government plunged ahead with its announcement and left the real work to be done by a task force later.

Now that the government has already decided to go ahead, it should at least try to determine quickly how to make the holding company as effective as possible. But we hope that in the future the government will stick to the principle that nonviable firms should be liquidated or merged, not propped up with public funds.

by Lee Si-hyung