Profiting from debt

Korean banks enjoyed a bumper year in 2017. According to the Financial Supervisory Service, the combined net profit at commercial and special-purpose banks more than tripled from 2.5 trillion won ($2.3 billion) in 2016 to 11.2 trillion won last year.

Their bottom line was helped by reduced loss reserves against struggling shipbuilders and shipping firms. Profit from interest jumped nearly 30 percent to 37.3 trillion won, the biggest since 2011.

It is great that banks are doing well, but the problem is that they still make money primarily by setting lending rates (the interest they charge borrowers) higher than borrowing rates (the amount they give back to customers for deposits).

The average difference in lending and borrowing rates rose eight basis points in 2017 to reach 2.03 percentage points. The spread widened to 2.32 percentage points in January, two months after the Bank of Korea raised its key rate for the first time in six and a half years. Banks are profiting from the colossal amount of debt held by Korean households.

In times of low interest rates, banks largely maintain rates through their own mechanism, so even if the central bank lowers its benchmark rate, borrowers don’t really feel the effect. But when the Bank of Korea raised its key rate in November, lenders were all too happy to charge higher interest again. They make easy money by acting fast in raising rates and slow in lowering them.

The Bank of Korea will almost certainly have to follow the Federal Reserve if it continues to raise interest rates.

The shock will translate to households owing as much as 1,450 trillion won. If banks do not correct their exploitative business, the pain will grow for the country’s debtors. The Financial Supervisory Service should strengthen its surveillance of banks and the pace of their rate hikes.

JoongAng Ilbo, March 2, Page 30