[EDITORIALS]Head off another crisis“The financial sector should not face a crisis because of overheating competition,” the governor of the Financial Supervisory Service has warned.
Though competition among financial institutions, based on market principles, cannot be halted, the regulating agency cannot just sit back and watch, because if banks collapse the damage extends to all Koreans. So it is absolutely right that regulators prepare when they see signs of competition getting out of hand, as can be seen now.
Whenever financial institutions run wild, trouble follows. When banks blindly gave loans to conglomerates in the 1990s, the financial crisis ensued. When credit card companies issued cards indiscriminately, the credit card crisis followed.
To see the behavior of credit card companies these days, one would think their industry’s crisis had already been forgotten. Their competition over zero-interest teaser rates and low-interest cash advances is discouraging At almost every event at a retail store, credit card companies can be seen offering zero-interest rates or gift certificates for purchases of a certain amount. Just three years ago, credit card companies’ recklessness cost them about 40 trillion won ($40 billion). The financial market was staggered, and the Korean economy is still suffering from sluggish domestic consumption because of it.
Another problem is the soaring number of home equity loans. Even now, banks, in tandem with mutual savings associations, are loaning as much as 80 to 90 percent of a housing unit’s value, though the Financial Supervisory Service recommends no more than 40 to 60 percent. Home equity loans doubled in the last four years, to 172 trillion won, and have gone up by 5 trillion won this year. The problem will worsen if interest rates soar and the home equity loans become bad debts. Both the financial market and the real estate market will be jeopardized. Japan’s example suggests the impact would far exceed that of the credit card crisis.
The Financial Supervisory Service should immediately order unhealthy financial institutions to correct their problems, keeping in mind that their failure to act quickly worsened the financial trouble and the credit card crisis. The people can’t pay for another crisis. They are still exhausted from the last two.
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