Seeking help from the private sector as usual

Cho Min-geun

The author is the business and industry news director of the JoongAng Ilbo.

“How much longer can we stop a crisis like this?” the president of a commercial bank lamented with a worried face during a recent meeting. At the time, five major commercial banks were joining forces to rescue the Korean Federation of Community Credit Cooperatives (KFCC) after its delinquency rate soared to the 6-percent level due to the insolvency of its real estate project financing (PF). As anxiety deepened, signs of a bank run were seen at some branches.

Financial authorities turned to commercial banks to rescue the KFCC, with banks injecting massive funds by purchasing bonds from it. After the government made an unprecedented announcement that all KFCC deposits will be guaranteed, the public unease began to subside. The situation was almost identical to what large securities companies had done when small securities firms were shaken by their insolvent PF loans last year.

The bank president expressed disappointment at authorities’ habitual rush to extinguish the fire. “It will be difficult to normalize the market unless follow-up measures are taken to shut down insolvent banks,” he said. He also lamented media reports of executives in charge of PF at securities firms receiving massive bonuses despite the chaos in the bond market created by securities companies.

After the controversy arose, the Financial Supervisory Service (FSS) began investigating the situation. In fact, 22 securities companies paid 352.5 billion won ($263.5 million) in bonuses to PF executives last year. It turned out that four securities firms that received financial injections during the crisis also paid bonuses of 77 billion won to their employees. Immediately after a crisis was averted, they had a massive bonus party.

Although there were obvious losses from PF, some securities firms did not reflect the outcomes in performance reviews. Some of the PF executives of small securities companies received payments far larger than 3 billion won — an amount far exceeding the salary of the chairman of a financial holding company. At the beginning of this year, the head of FSS and the presidential office criticized commercial banks for paying a massive bonus to their members, but the criticism was futile.

After all, PF became the most dangerous detonator of the Korean economy because we failed to control the moral hazard. It usually takes years or more for real estate investment to make a profit. During the process, there are many risks. But those who are after high performance bonuses usually hide the risks while inflating the expected profits to the maximum in the performance review. When losses occur, companies or customers of financial products bear the loss. When problems implode simultaneously, market participants are forced to share the burden alongside the government.

The KFCC, which is under the jurisdiction of the Ministry of Public Administration and Security, was outside the supervision of the financial authorities. Under the relatively lax supervision system, KFCC gave loans indiscriminately that were marred by frequent embezzlement and breach of trust. Many expressed concerns about the blind spot in the monitoring system of the KFCC, but no one could refute the ministry’s argument that it has jurisdiction over KFCC.

The disasterous 2023 World Scout Jamboree, which worried the entire nation, seems to have some similarities. The Ministry of Gender Equality and Family, the leading ministry of the event, is a small organization with less than 300 members that was also scheduled to be dismantled. Contrary to the minister’s strong promise, it quickly became clear that the ministry lacked the experience and ability to properly prepare and manage the large-scale event. The same goes for the North Jeolla provincial government. Criticism followed that the province was more interested in securing the budget needed to build infrastructure instead of successfully hosting the event. The debacle was only addressed after universities, banks and large companies stepped in to help.

Neither the failed Jamboree management nor the KFCC bank run can be overlooked just because the urgent fires were extinguished. As Prime Minister Han Duck-soo said, a process of analysis and reflection must follow in order to prevent a repeat of the shameful situation where the government must ask for help from the private sector at times of crisis. And yet, politicians are bickering over whether it is the fault of the previous administration or the current administration. That helps explain why the country’s administration is third rate, while politics is fourth rate.