[Viewpoint] Stop whining, rescued banksConcerns have grown lately about government control over financial services. Tensions between the government and KB Financial Group have raised fundamental questions about the position, role and public duty of banks in Korea’s economy.
Indirect financing is centered on institutions, while direct financing is centered on the market. Banks are part of the former, receiving deposits from customers and raising funds with the money. Those funds are supplied to households and companies in the form of loans. Banks, thus, redistribute funds. They also operate payment and settlement systems, making sure money flows smoothly in the economy.
These two roles are banks’ public functions. Banks are also private corporations owned by shareholders, but at the same time they are part of the social infrastructure. Because of their public functions, banks are strictly monitored by the financial authorities. That’s why there is no Semiconductor Supervisory Service or Cell Phone Supervisory Service, but there is a Financial Supervisory Service.
In the aftermath of the latest global crisis, discussions are ongoing of a redesign of the international financial system. One important argument is that the ownership structure and reward systems of financial institutions should be revised and monitored, and control over them should be reinforced. This argument is based on criticism that reckless, irresponsible management at financial institutions caused the financial crisis.
Unreasonably high rewards for managers of financial institutions have pushed them to favor unnecessary risks and to become obsessed with short-term gains, critics say. Based on this perspective, global efforts have spread to control salaries and bonuses of top managers at financial institutions.
Some worry that such a move may develop into unreasonably tight controls. However, the financial problems the policies mean to fight have spread to the real economy, causing many to suffer. Injecting public rescue funds also placed an enormous burden on society. Thus, the move to strengthen regulation over the financial industry will likely continue.
One particular issue that we must review among the past practices of financial institutions is whether or not bank boards of directors, including outside directors, have performed their roles properly. In fact, critics have said for a long time, since even before the latest crisis, that boards of directors at banks, which have significant power, have failed to perform their role.
For a giant bank, there is no single clear controlling stakeholder. Under such a situation, a tacit agreement between managers and outside directors allows the managers to sit on their positions for a long time and enjoy countless benefits. At the same time, the possibility of bad judgment among management grows.
It is appropriate for management and boards of directors to maintain a dialogue and even a certain level of tension to act as a check on each other. The Organization for Economic Cooperation and Development has advised that a bank’s board must effectively check management for the sake of shareholders and society. The Korean government, which has been trying to reform the outside director system at banks since last year, recently announced new standards for these directors, although they’re being called “voluntary regulations” enacted through the Korea Federation of Banks. Under the guidelines, outside directors’ tenures are restricted, and the directors are also required to devote a certain number of hours to their duties at the banks.
Banks are a core component of an economy, performing private and public roles at the same time. Amidst the global financial crisis, the government extended its guarantee scheme for domestic banks’ foreign-currency denominated debts because of these roles. While the government took action to protect banks’ public functions, the banks, in the end, benefited by increasing their private gains.
It is wrong for the banks to take support during a crisis for granted while criticizing supervision of them as the government’s attempt to control them. The global financial crisis has not been completely overcome, and there are still signs of a new crisis from overseas.
In order to overcome the current crisis, banks’ public roles are important. When banks fail, the nation’s economy can also collapse. In such a situation, close dialogue and cooperation between the government and banks are crucial. To this end, it is very important to reform the human networks and systems of banks. Criticizing such efforts as a government attempt to control banks reflects ignorance of the situation.
It is time to have constructive discussions on the appropriate role of banks in overcoming the crisis and preventing another one, and to redefine the relationship between the government and banks, rather than waste time on debates about state control.
*The writer is a professor of business administration at the University of Seoul. Translation by the JoongAng Daily staff.
by Yun Chang-hyun