[Viewpoint] Change you can take to the bank

There are many controversies over U.S. President Barack Obama’s reform plan for the financial industry.

You cannot declare that the so-called Volcker Rule is a resurrection of the Glass-Steagall Act, which separated commercial banks and investment banks for over five decades starting in the 1930s. Instead, the intention of this measure is to restrict some business activities such as hedge fund activity and proprietary trading in order to protect the assets of the banks.

Nevertheless, the Volcker Rule is being met with dissent in Europe, where the universal banking system has been successfully established. The universal banking system allows financial institutions to engage in both traditional banking services such as loans and deposits and securities businesses such as the trading of stocks and bonds.

If the current situation is not dealt with carefully and appropriately, there might be a need for excessive re-regulation down the road.

Historically, the financial sector has recovered ahead of the actual economy. In fact, the fast recovery of the financial sector accelerates the growth of the actual economy.

Rash regulations could lead to a high cost structure in the financial industry, hindering productivity in the actual economy.

Now let’s look at another issue in the banking sector.

Over 30 years ago, when the United States and the former Soviet Union were competing to send men to the moon during the Cold War, mathematicians and scientists at NASA received some of the highest salaries in the U.S.

In the early 1980s, financial engineering stepped into the limelight, and demands for highly educated workers grew. At the same time, demand for workers within NASA dropped. The banks on Wall Street began attracting the best minds in the country by offering higher salaries. They also made significant investments in information technology so that mathematicians and scientists could use their talents to the fullest.

The purpose of financial engineering is to resolve the asymmetry of information and risk management, and the field advanced rapidly.

Financial engineering provided high added value to the actual economy and made great contributions to enhancing productivity around the world.

What will happen if the talented people in this sector are not compensated as handsomely in the future? The IT system that has been built with tremendous investment will become useless, and the financial sector could lose qualified professionals. That’s why American banks are agonizing over outside pressure to cut bonuses.

Korea has already produced many global champions, and its economic size has grown considerably. Now we need to think seriously about change in the banking industry. We have to choose whether to create a global leading bank and have it grow with Korean companies or have it be self-sufficient in the domestic market.

Combing the country’s two largest banks wouldn’t even create one of the world’s top 50 financial players.

A bank’s size is very important. Larger banks can boost efficiency and create a distribution network in the global capital market. They also can provide top-notch financial services to Korean companies operating and competing all over the world.

Banks should be able to facilitate funding, buy securities and bonds and provide financial consulting in the global capital market. Banks can only make quality investments tied to developing a highly talented workforce, a supreme IT system and networks in the international capital market when they become internationally competitive in terms of asset size.

Financial professionals cannot be educated and trained in a few years. The rotation system in the banking industry that hinders specialization needs to be fixed.

Furthermore, Korean banks replace CEOs too often. Executives are often replaced regardless of their management track record and overall performance.

This practice destroys consistency in management and leads to missed opportunities.

Heads of leading banks in advanced countries hold the post of CEO for over 10 years. While JPMorgan Chase became the biggest bank in the world through a series of mergers of equals, John McGillicuddy remained the CEO for 16 years. Bill Harrison took over the post and served as CEO for nearly 10 years, and while in office, he chose Jamie Dimon as his successor.

This type of stable leadership structure and management succession system is found in most leading banks such as Banco Santander and HSBC. Most of these CEOs started as low-level bankers and rose up the ranks through internal promotions. They have accumulated experience and developed internal and external networks for decades.

When a competent CEO is empowered based on respect from employees, success is sure to follow.

*Translation by the JoongAng Daily staff.
The writer is an honorary chairman of the U.S. Air Force Association’s MiG Alley chapter.

By Kim Soo-ryong