[VIEWPOINT]To Function, Banks Need Stable Profits

If Banks Are to Modernize and Maintain Capital, Those Pesky Fees Are Needed to Cover The Costs

Criticism broke out recently when Korea First Bank announced that it would charge fees to maintain deposits, and other banks prepared to follow suit.

This is nothing out of the ordinary. Voices of complaint always make themselves heard when banks establish new fees or raise existing fees and also when the banks raise lending rates without raising deposit rates.

Criticism attends increases in the price of the banking services because the public understands these services as a sort of public good like subway and medical services. Companies that market stocks and other securities face less complaint over their fees, although they, too, are financial institutions, because they serve only a limited public.

In fact the banks have operated as public institutions up to now. Because greater weight was put on public benefits than corporate profits, many banks provided services free or below cost. And services were provided equally to all customers regardless of their contributions to the bank. The banks valued individual customers and small and medium-sized firms, even though they contributed less to the banks' profits.

But a radical reform is needed in the perception of banking service fees as the banking industry opens up and gains autonomy. In order for the banks to survive, adequate capital must be maintained and profits must be reasonably dependable. Banks can no longer afford to provide services free or below cost.

More than any other industry, the banking industry has to invest in the information and computerization sectors. If the consumers who receive benefits from this investment do not pay adequate fees, the banks have no way to recover their capital. In this recovery process, charging fees for newly established services or raising existing ones is inevitable. These increases meet great resistance from consumers who are used to low banking fees. Nevertheless, if the banks do not make efforts to establish adequate prices for banking services, the foundation for maintaining regular profits will never be achieved.

The struggle surrounding banking fees is not confined to Korea. The banking industry of the United States, when it underwent restructuring in the 1980s, faced great resistance when it introduced new fees and raised existing ones. But the U.S. banks strongly pursued profit-oriented management.

As a result, the U.S. banks were able to overcome the hardships of the 1980s. The amount of profit from banking fees rose from 17 percent in 1987 to 39 percent in 1999. The difference between the deposit rate and lending rate increased from 3.4 percent to 5.2 percent in the same period, which shows that U.S. banks have undergone great changes in the structure of profit and price systems.

But it does not mean that gaps in banking services should be allowed to develop, or that insufficient services for less well-to-do citizens should be tolerated to raise the profitability of banks. All citizens have a right to receive adequate financial services. But the banking sector should not be made to shoulder the burdens alone. Consumers and the government must work out their parts. For instance, consumers should use machines rather than depend on bank personnel for routine transactions, and they should make fewer deposits and withdrawals to lower the prime costs of banks.

Also, the government should consider measures to supplement the efforts made by the banks and their customers. For instance, government should subsidize the use of financial services by the elderly and should pay the full cost of public transactions that are handled by the banks for the government. If the government pushes its responsibility to the banks as it has done in the past, the maintenance of adequate profits of the banks will be delayed, together with the restructuring of the financial sector.

The writer is the chief of the banking team at Korea Institute of Finance.

by Kim Byoung-yun