[Column] Banks were the problem in financial crises

Koh Hyun-kohn

The author is the executive editor of the JoongAng Ilbo.

The foreign exchange crisis which hit Korea in 1997 can be summed up like the following. Companies disproportionately expanded on debt. Commercial banks and merchant banks raised funds mostly in Japanese capital to back them. They overlooked the basics of finance and offered long-term loans on short financing. All went well until the Asian financial crisis landed on emerging economies to devastate their sovereign credit rating.

The mismatch in financing bulged out, scaring off foreign capital. The result was a default crisis. Short-term foreign debt owed by Korean financial institutions amounted to $71.8 billion. The foreign debt binge owed first to the government for neglecting supervision on financial institutions while liberalizing foreign capital flow.

Companies that went overboard with leveraged investment — and consumers spending beyond their means — amid the lush U.S. dollars are not free from the liability. But the primary culprits are the banks immersed in interest income from foreign debt. Merchant banks were made scapegoats, but commercial banks were bigger lenders of foreign capital.

Banks underwent sweeping mergers and acquisitions as a result of the financial crisis. The names changed, but their business ways stayed the same. Banks received tax-financed emergency bailouts worth 160 trillion won ($121 billion). Once they passed the worst, they fell back into moral hazard. They came under probe by the Board of Audit and Inspection after lending interest-free loans to their employees and doubling their executives’ pay for more than three years. They partied on public funds shortly after the crisis. They sought bailouts from the government and lavished themselves with interest income from expensive loan rates. While the government was dumfounded, people felt betrayed.

Banks betrayed the people again during the 2008 global financial crisis. Their bluffing was exposed. They hyped about being top-rated and mega-scale. But that was all talk. They had gotten bigger, but their bottom line still entirely relied on revenues from interest charging. When they really needed greenbacks, they couldn’t find any.

They again turned to the Bank of Korea to pay off their foreign debt and asked the government for guarantee on their foreign loans. Upon endorsing the payment guarantee by state policy banks, President Lee Myung-bak scorned commercial lenders for seeking government assistance while being well paid. Banks hurriedly cut their fat salaries. They put up a show of issuing a joint statement to fight the financial crisis.

But banks turned greedy again once they passed the storm. They sat on their coffers and kept liquidity to themselves despite government pressure. While corporate funds dried up, household loan rate shot up in 2009. Lee lashed at them for their moral hazard during the crisis period.

Banks have betrayed the people once again when interest rates soared in the fastest pace upon the 40-year-high inflation last year from the pandemic. They profited big off the weak class and small merchants. Four major banks — KB Kookmin, Shinhan, Hana and Woori — earned a whopping 39 trillion won off interest charges only. Their record profit had nothing to do with good business. They entirely benefited from a spike in interest rates. They deserve to pay a windfall tax. Around 95 percent of their net profit came from interest income. (The share is around 60 percent for banks in advanced countries.)

Last year, the gap between deposit and loan rates widened from 2.21 percentage points to 2.55 percentage points. They explain that the gap widens under a rising rate environment. But anyone who has been to the bank to borrow money knows how helpless banks make you feel. Banks can narrow the gap by lowering the loan rate if they have the will. But they don’t, and instead paid their employees hefty bonuses of over 1 trillion won. Either they are clueless, conscienceless, or careless.

When President Yoon Suk Yeol rebuked them by defining banks as “public assets,” they hurriedly pledged to increase social contributions by 10 trillion won over the next three years. But their real cash donations stopped at 280 billion won. That’s not all. They shaved loan rate slightly while pulling down deposit rate more precipitously. As in the past, they are waiting out for the rain to stop.

The president’s remark about banks being public assets drew complaints from banks about infringing on their independence and the market principle. Government meddling is not desirable. But banks have sought government help too many times to cry for help in crisis.

This is no time to dispute about whether banks should be regarded public assets or not.

President Yoon Suk Yeol speaks at the third meeting for macroeconomic review of the economy at the headquarters of the Korea Federation of Banks in Seoul, Sept. 30, 2022. [JOINT PRESS CORPS]

The crisis is not over yet. When economic downturn deepens, bad debt will pile up at banks. If they struggle on insolvent loans, they will turn to the government again. Once the rescue comes in, they will return to their profit-making on income and bonus party as they did before. Banks remain at the bottom in global competitiveness while many companies are world-class, as they cling to the outdated practice of doing business in a complacent manner and seeking relief when troubles hit them. Would banks have become more competitive if there had been less government intervention and regulation? Should the government help them again when they are in trouble? But why should the people help banks when they do not help the people?