Distorting the financial market

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Distorting the financial market

 The government’s intervention in the realm of private finance goes over the top. It plans to pardon more than 2 million financial delinquents to help them recover their credit and to lower the upper limits of draft accounts to help control soaring real estate prices. “Financial pardons” refer to the elimination of related records on overdue debt. After giving a certificate of appointment to new Financial Services Commissioner Koh Seung-beom on Monday at the Blue House, President Moon Jae-in ordered him to prepare a “financial pardon” for over 2 million defaulters across the country.

The order first came in July, but the financial industry says it did not expect such an outright rush from the president. Two months ago, the government announced a bold plan to delete data on debt arrears amounting to less than 20 million won ($17,219), as long as borrowers pay back their debt by the end of the year.

Financial pardons can distort market mechanisms as opposed to the apparent goodwill to help people hit hard by the pandemic. Banks can survive on the interest they levy on their clients in return for loans. That’s why financial institutions jointly filter out defaulters by exchanging related information. But if pardons are implemented, they have trouble distinguishing defaulters from the rest. If the credit of existing defaulters is raised, they can borrow money from banks again. Banks could face more trouble, which can lead to the escalatation of instability in the financial market.

Despite such imminent risks, banking institutions do not have the power to refuse an order from the government because of the enormous power the Financial Supervisory Service (FSS) wields. If financial companies excuse themselves, the moral hazard can permeate the whole industry, not to mention their weakend international competitiveness.

The four major commercial banks’ decision to lower the upper limit of their draft accounts to 50 million won from the previous 100 million won also confuses the market. The measure the government forced them to take is apparently aimed at helping cool the overheated housing market. But it will only deepen the distress of the people who really need the money — the very victims of the government’s repeated fumbles with housing policy.

Interest rates of commercial banks are rising fast already. Even if the government does not step in, people face more difficulties in getting loans than before. If the government wants to neutralize the credit system of banks, it can shake the fundamentals of our financial market.
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