Banking on the status quo
The financial sector is the circulatory system of an economy. That is why the government spent 170 trillion won ($167.8 billion) of taxpayer money to bail out financial companies in the wake of the Asian financial crisis of the late 1990s. The economy cannot run if its financial engine breaks down. The Korean economy is currently stuck in slow motion partly because its financial sector remains underdeveloped. Liquidity, analogous to blood in the circulatory system, is ample. But it is not carried to the necessary organs because the heart is not functioning well.
The government is well aware how serious the situation is. The government is in charge of licensing financial institutions and their business operations. The Financial Services Commission early this year announced an outline to raise the competitiveness of domestic financial institutions. Its measures were designed to do away with unfair, incompetent and selfish business practices. It came up with slogans like competition and innovation, convergence of the finance and real economy and consumer protection. Its grand scheme made the newspapers.
Despite such grandiose rhetoric, no changes were made. In fact, the industry is worse off now than before. Banks blame external factors - as they always do. They claim they cannot become more competitive while the economy is doing so poorly and interest rates remain so low. But they are hardly in a position to complain.
American and European banks are performing well these days even when their economies are doing worse than Korea. Their return on equity tops 10 percent, double that of Korean banks. Multinational investment banks are doing better than they did before the 2008 global financial crisis.
Local banks failed to turn themselves around because they lacked the will. Heavy regulations are a huge spoiler. Entry to the banking sector is basically locked because the government doesn’t allow it. The last time banks were created was under President Roh Tae-woo in the late 1980s and early 1990s. There has not been a newcomer to the banking industry for 22 years.
Since the 1997 financial crisis, when the country had to seek a shameful international bailout, allowing a new bank into Korea became unthinkable. Bureaucrats and the industry believed enlarging current players and turning them into holding groups was the key to making the industry competitive by global standards. The last two administrations looked into licensing online banks, but did not proceed.
No advance can take place in a capitalist society without fierce competition and creative destruction. Who would want to restructure and innovate when their playing field is safe with no threat of a new formidable player or any kind of genuine contest? Why go through the hassle of making inroads overseas when you are comfortably protected on your home turf? It’s no secret in the industry that the four largest banks are supplied with 2 trillion won worth of deposits and loans a year simply by opening their doors for business five or six days a week. Yet there are few banks with net profits that exceed 1 trillion won a year. Management does nothing to shake off weak businesses or outlets and instead colludes with labor unions to keep operations elephantine.
There are few countries in either the developed or developing categories that prohibit new banks. Anyone with the capital, resources, and professionalism can start business as a town bank. Big American banks like Wells Fargo and Bank of America all started off humbly. They grew to their current sizes through numerous mergers and acquisitions. They must endlessly come up with new business strategies, such as opening on Saturdays, to compete with newcomers.
Korea’s banking sector needs new blood. If licensing a newcomer is too risky, authorities could consider paving the way for a mutual bank or regional bank to enter the commercial and consumer banking business. It is the only way to shake up the banking sector and strengthen the heart of our economy.
JoongAng Ilbo, July10, Page 28
*The author is the head of the Economist, a weekly business news magazine published by the JoongAng Ilbo and the Korean edition of Forbes.
BY Kim Kwang-ki