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(EDITORIAL from Korea Times on March 24)

Economy 07:03 March 24, 2023

Lingering financial jitters
Banks' collapse should not be ignored

On Wednesday, the U.S. Federal Reserve raised its benchmark lending rate by a quarter percentage point, pushing the target range to 4.75-5.00 percent.

The additional baby step reflected the Fed's difficult position in balancing two conflicting problems ― fighting inflation and calming financial unrest in the wake of three regional banks' collapses.

It seems to have concluded the former task is more important for now.

However, the financial turmoil is far from over, even temporarily.

"The Fed is prepared to use all our tools as needed (to keep the system safe and sound)," Jerome H. Powell, the Fed chair, said while acknowledging the need to boost banks' supervision and regulation.

The ongoing financial instability differs from the global financial crisis of 2008. Fifteen years ago, bad debts and asset bubbles were the problems. However, Silicon Valley Bank and Credit Suisse had sufficient funds and relatively few bad debts. Still, they collapsed very rapidly, faced with bank runs. They both lost depositors' confidence, if for different reasons.

SVB and Credit Suisse also had one more thing in common ― they invested heavily with depositors' money without preparing sufficient measures to avoid risks, namely higher interest rates. In an industry like banking, stability should come ahead of aggressive management and even innovation. All the more so because the exodus of funds can occur at the speed of light in this era of digital banking.

Korean banks appear immune to turmoil halfway across the globe. The main reason: they adopt a far safer business strategy of raking in spreads between deposit and lending rates. However, there are at least two reasons they cannot remain complacent. First, global financial jitters are contagious and attack the weaker links of the chain, as the nation bitterly learned during the Asian financial crisis of 1998. Second, Korea has one of the highest household debts and a plunging housing market.

Korea's problems stem from the successive government's policy to use a housing boom to bolster the economy whenever it showed signs of slumping. Many homeowners find it difficult to repay even mortgage interest amid soaring interest rates. Large banks are relatively safe as they focus on lending for apartment purchases. But the secondary lenders, including brokerages, underwriters, and savings banks, which bet heavily on so-called project financing (PF) in commercial buildings, will likely emerge as a fuse for possible turbulence.

Twenty-five years ago, Koreans drew global attention with their gold-donation campaign to escape the worst financial crisis. Few Koreans will, or can, do so even if another crisis comes. They have seen banks survive with taxpayer money as they are too big ― and too public ― to fail. If another financial unrest hits the nation, it will be employees at securities and insurance companies who must bite the bullet. That is because the financial authorities will allow them to be merged by healthier players instead of bailing them out with public funds. The era of privatizing profits and sharing risks should end.

Naturally, the Financial Supervisory Service (FSS) recently vowed to tighten prudential guidance, telling banks to keep sufficient reserves.

However, the biggest concern for Korea's economic policymakers may not be the financial crisis, but the business slump. The Fed's latest rate hike has widened the rate gap between the U.S. and Korea to 1.5 percent, fanning fears of an exodus of foreign funds. The OECD has raised its growth forecast for this year for most of its member states ― except for Korea. If the Bank of Korea follows the Fed's footsteps, Korea's economic growth will slow even further.

In short, Korea's economy will get worse for the time being before it gets better. That will deal a critical blow to the already sluggish approval rating of President Yoon Suk Yeol, reeling from two unpopular decisions ― a hasty diplomatic approach to an unrepentant Japan and an attempt to make Koreans work even longer.

Voters are watching how Yoon's prosecutor-studded administration will weather the financial, diplomatic, and social mess.

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