The Attempt to Regulate the Prime Lending Rate is a Classic Example of Backward State-Controlled Finance

On December 30, 2024, a proposed amendment to the Banking Act—centered on regulating lending rate spreads—was introduced under the leadership of Democratic Party lawmaker Min Byung-deok. On March 6, it was announced that this amendment, along with the Special Semiconductor Act, the Inheritance and Gift Tax Act, and the Franchise Business Act, would be designated as a fast-track (expedited) bill and pushed through the legislative process. Ultimately, however, the plan was put on hold and the bill has been temporarily suspended.

The core of the proposed Banking Act amendment is the claim that including insurance premiums and mandatory statutory contributions in loan interest rates violates the beneficiary-pays principle and places an excessive burden on financial consumers. Accordingly, the bill seeks to prohibit banks from reflecting such costs in lending rates. In effect, it is an attempt to regulate the add-on interest rate spreads that banks determine through competition in the financial market.

Controlling add-on interest rates—arguably the only component of lending rates that commercial banks can independently determine—reflects a mindset that refuses to acknowledge the existence of a financial market. Korea’s history of government-directed finance is hardly new.

Under government pressure, during the COVID-19 pandemic in 2020, a total of 20 institutions—including all financial industry associations, the Credit Information Service, and credit bureaus—signed the “COVID-19 Credit Recovery Support Agreement.” Under this agreement, if debts of 20 million won or less were repaid within a certain period, delinquency records would not be registered. While this may have appeared to reduce the number of multiple-debt holders, it ultimately produced adverse effects by encouraging moral hazard, undermining the credit evaluation system, and eroding financial autonomy through unconditional debt relief.

Government interference and control over bank interest rates is, in fact, a long-standing and chronic problem. In the name of reducing household debt and stabilizing housing prices, the government pressures banks to raise lending rates, only to later reverse course—pressuring them to lower rates again under the banner of easing financial burdens and supporting homeownership through various mortgage programs. In reality, it was precisely the government’s aggressive expansion of lending in the name of helping people buy homes that fueled the rise in household debt and housing prices. These outcomes are, ultimately, the result of government intervention itself.

This is something that should be left to the market. When left to the autonomous decision-making of market participants, interest rates adjust naturally. Lending rates are determined by adding bank-specific spreads to benchmark rates such as COFIX or bank bond yields. Loan interest rates should be allowed to fluctuate according to market rates and bank-determined spreads. Interest rates are prices, and the more the government attempts to control and intervene in prices, the more distorted the financial market becomes—leaving ordinary financial consumers to bear the full cost of the damage. Even the situation in which banks’ profits temporarily increase under a high-interest-rate policy aimed at reducing household debt, while ordinary people struggle under mounting interest burdens, is ultimately the government’s responsibility.

Regulating add-on interest rates is, in essence, price control in the financial market, and it only amplifies the harmful effects of government-directed finance. At a time when Korea should be advancing its financial industry by combining its strengths as an ICT powerhouse with fourth industrial revolution technologies such as AI, it remains trapped in stagnation under the shadow of dirigiste finance.

The proposed amendment to the Banking Act must be blocked from reaching the plenary session or voted down. At the very least, the authority to determine add-on interest rates should be left to banks as part of their inherent managerial autonomy. Outdated government-directed finance must not continue to hold back Korea’s progress toward becoming an advanced economy.

Ko Kwang-yong
Head of Policy, Center for Free Enterprise

Korean version: https://www.cfe.org/20250320_27417