[FORUM]Bankers must keep goals in focusShylock, in the Merchant of Venice by Shakespeare, finds himself gone to ruin because of two mistakes. First of all, he did not stand strong against external pressure. Second, his conduct was unworthy of a banker. His desire to avenge old insults he had received was too strong for him to overcome; had he been driven by intellect rather than emotion, the story would have ended differently.
A financial sector manager needs composure of mind and prudent behavior. Shylock, however, lost his composure and was dominated by emotions. He did not want the principal and interest; he wanted to cut one pound of flesh from Antonio's body when Antonio defaulted on a loan, the contract Antonio had originally agreed to. This behavior on Shylock's part was born of hatred and vengeance, the emotions that eventually ruined him.
Unlike Shylock, foreign creditor banks that negotiated with the Korean government during Korea's financial crisis in 1998 acted professionally and were successful in recovering their money with their profits. They made it clear to the Korean government, then floundering in a sea of debt, that there was no possibility that the principal and interest Korea owed would be reduced. Furthermore, they asked for a government guarantee before approving requests by the Korean private sector for extensions of their loans, a tactic that greatly reduced the banks' risks in their lending to Korea. Finally, they lent the Korean government the new funds at an interest rate of 2.25 to 2.75 percent over the London Inter-bank Offering Rate. The interest rate was high despite the Korean government's payment guarantee and the International Monetary Fund's promise of a bailout for Korea.
The foreign banks acted according to their principles, not shaken by sympathy or mercy. They remained true to their calculations and strategy, and thereby they succeeded.
The current behavior of Korean banks is quite different, though. Even though they may not be in the same league as the foreign banks, they should have acted to maximize their revenue and minimize their risks, the guiding principles of sound banking.
The recent Korean Development Bank loan to Hyundai Merchant Marine showed that Korean banks are in a financial backwater. How could the bank possibly give $400 million to Hyundai Merchant Marine without the knowledge of the president of the Korean Exchange Bank, then the main creditor bank of the shipping firm? Why do the former presidents of the banks involved now tell different stories? How can they explain the additional loan of about $410 million last year? Korean voters as well as bankers are watching this matter. If the opposition party's allegation that the loan was a result of government pressure to send cash to North Korea is true, it is a disgrace for the banks that were involved and our banking system in general.
The recent increase in household loans extended by local banks is also a problem. Korean banks have lent large sums to individual apartment owners without asking about the purpose of the loans, and much of the money went into speculative apartment purchases. Total outstanding household loans exceeded $159 billion last month, and the banks are ultimately responsible. Banks argue that all they needed to extend loans was collateral, but if the real estate bubble bursts, we may see another financial crisis as that collateral starts declining in value. The alarm signals are already ringing; loan defaults are rising. Even though the banks introduced a personal debt workout system this month, its effectiveness is questionable. How can they deal with loans for speculation and the tremendous debts of farm households?
It would be better for neutral arbitration commissions to deal with workout programs, which could include loan extensions, interest rate reductions and write-offs of some of the principal. Neutral bodies could do a better job than the banks. The people of Korea gave their pound of flesh, just as Antonio offered to do, to restore Korea's tattered credit rating in 1998 and the succeeding years. Now Korean banks have to commit themselves to good banking principles without being shaken by government pressure or populist sentiment.
The writer is the director of the JoongAng Ilbo Economic Research Institute.
by Roh Sung-tae