Bad loans and banks

Market interest rates haven’t fallen despite the Bank of Korea’s decision to cut the key interest rate. President Lee Myung-bak even ordered his Cabinet to deploy measures to make interest rates in the market go down in line with the benchmark interest rate.

In a radio speech on Monday, the president asked commercial banks to supply capital with lower interest rates to where they are needed, rather like supplying water to dried-out rice paddies.

The president has asked banks more than five times to provide capital, but his words have fallen on deaf ears in the financial sector. It is necessary for the president, the financial authorities and banks to think seriously again about how to resolve the credit crunch in the market.

First, President Lee should refrain from commenting on concrete financial measures. Banks won’t increase the supply of capital and interest rates in the market won’t go down just because the president explicitly called for these measures to be taken. If they don’t suit the markets, the system won’t work.

The president runs the risk of damaging his authority by repeating the same message without getting a reply.

If the government truly wants to mitigate the credit crunch, it should search for practical methods to do the job, instead of resorting to presidential announcements. Banks aren’t lending money because they are worried about bad loans. When banks are afraid of bad loans, they won’t budge, no matter what other people tell them to do.

In this case, the only option is to reduce the burden of bad loans on banks or substantially increase the banks’ capital. If banks are not confident enough to distinguish good companies from bad ones, the financial authorities can screen them for good ones.

To increase banks’ capacity to supply capital, the government can consider pouring capital directly into banks, or buy their subordinated bonds.

What’s needed now is not words but measures that will work.