Korean banks under pressure to redistribute wealth

Industry

Published: 15 Feb. 2023, 17:25 Updated: 15 Feb. 2023, 19:21

Korean banks under pressure to redistribute wealth

Signs of four large banks in Korea, KB, Woori, Hana and Shinhan [YONHAP]

President Yoon Suk Yeol stressed that banks, which have an advantageous position, need to reduce their profits from lending and deposits.

His comment was based on recent reports that commercial banks were enjoying hefty bonuses and severance paychecks from the interest rate hikes since the Bank of Korea started tightening monetary policy.
He said those profits should be used in helping vulnerable people, including low-income households that are exposed to higher interest rates due to their low credit scores.

Banks are being pressured by the financial authorities to redistribute wealth.

Financial Supervisory Service (FSS) chief Lee Bok-hyun once again noted the public role played by banks and mentioned the need for dramatic support from banks to society during an executive meeting on Tuesday.

He highlighted the need to “intensively review” ways to intensify market competition in terms of loans and deposits.

“The five largest banks make around 60 to 70 percent of all loans and take 60 to 70 percent of all deposits,” said Kim Jae-gap, a spokesperson at the FSS bank supervisory team. The FSS will “review ways to create a more competitive environment for banks. Making it easier for customers to refinance their loans could be one example."

The strong stance is in line with President Yoon Suk Yeol’s order to come up with measures to help households suffering from higher interest rates while banks enjoy massive profits from the central bank’s aggressive monetary tightening.

“It is appropriate for banks to help the people, especially the self-employed and small business owners, with their profits to achieve win-win financial benefits and build a solid reserve in case of future instability,” Yoon was quoted as saying by presidential spokesperson Lee Do-woon on Monday.

The graph shows the total amount of bonus paid by five major banks in Korea. [FSS, OFFICE OF REP. YANG JUNG-SUK]

KB, Shinhan, Hana and Woori Financial Groups, the four of the largest financial holding companies, together logged an all-time high net of 15.9 trillion won ($12.3 billion) last year. The high interest rates accounted for the record, reaping 39.7 trillion won from interests alone.

Banks provided their employees with bonuses that are up to three times the monthly salary last year with this money. The total amount of bonus paid by five commercial banks — KB, Shinhan, Hana, Woori and Nonghyup — was 1.3 trillion won, according to a report FSS submitted to the office of independent lawmaker Yang Jung-suk.

Banks also paid retirees with severance pay of 700 million won on average per person as of late last year.

The FSS said it will review to see if bank bonuses were paid in a deferred manner, in accordance with the current financial law that regulates banks to pay 40 percent of the bonus for board members and financial investment officers of financial companies over a three-year period.

The table shows the total amount of severance pay that four major banks gave their retirees on January. [EACH COMPANY]

This is to say that if the company has set 100 million won as the end-of-the-year bonus, 60 million can land in the employee’s bank account at once and the other 40 million can be paid over the following years. The goal of this regulation is to prevent bankers from working for the short term.

“Banks need to consider medium-and-long-term indicators, such as future loss and financial stability, when evaluating performance and not lean too much towards short-term profits,” Lee added.

The financial regulator will review applying the bonus policy to more bank employees and draw up measures to have banks hold reserves to prepare for a potential crisis instead of spending too much on bonuses, according to the FSS chief.

Banks will also enlarge their social contribution fund to serve the “public good” as mentioned by the president, co-raising 500 billion won to provide financial support to the financially vulnerable. The FSS will encourage their active participation by disclosing each company’s social contribution records to the public.

“The regulator’s call for adjusting bank deposit rates last year wrought a distortion in the market and consequentially steered banks to seek profit from interest,” Korea University economics professor Kang Sung-jin said.

“It is appropriate to encourage competition among banks by allowing them to set their own loan-deposit margins,” Kang added.

BY HA NAM-HYUN, SOHN DONG-JOO [sohn.dongjoo@joongang.co.kr]