Time for banks to act

The Bank of Korea’s Monetary Policy Committee lowered the benchmark interest rate by 0.25 percent from the current 4.25 percent to 4 percent on Friday. This amounts to 125 basis points in three cuts over a month.

The interest rate on loans set aside as financial policy funds for small- to medium-sized firms has also been lowered from 2.5 percent to 2.25 percent. This is an indication of how rapidly policy makers believe that the real economy will weaken with the global financial crisis. The move is also aimed to mitigate the interest burden on small- and medium-sized firms and households that will suffer most from an economic recession.

Red flags have recently been raised for all domestic macroeconomic indexes, such as production, consumption, employment and investment. The dark shadow of an economic recession has already been cast. Economic growth during the third quarter this year dropped to 3 percent and the observation that it will be difficult to reach the government forecast of 4 percent is beginning to ring true. Once the world economic recession sets in next year, the consequences will be more pronounced.

We think the Bank of Korea’s additional lowering of interest rates was a timely preemptive measure against an economic recession. The bank has also started to buy bonds issued by domestic banks to alleviate their capital difficulties. Except for tax cuts and expansion of fiscal expenditure, all the government’s promised financial policy measures have been implemented.

It is the banks’ turn to act. It is important to prepare in the medium to long term against an economic recession, but what is imperative is having money circulating in the markets. Healthy firms are about to collapse as liquidity dried up long before a recession fully set in.

If firms collapse because of a tight capital market, measures to support businesses, slated to be implemented next year, will be meaningless. The problem of won liquidity at banks has been solved to an extent thanks to the lowering of interest rates and purchase of bank bonds. What the banks should do from now on is to let money flow into firms in dire need for the real economy to move. Of course, this does not mean heedlessly pouring money into firms that will collapse anyway. The elaborate screening for loans once used in ordinary times to distinguish healthy firms should be put into action now.

But banks should not hold onto money lest healthy firms fall into insolvency.