When Banks Escape Government Control

An embezzlement incident involving KRW 61.4 billion occurred at Woori Bank. Such incidents happen frequently at multiple banks, yet no meaningful solution emerges. It simply ends with punishing the person who committed the wrongdoing. No one takes responsibility. It is brushed off as something that can just happen. Why is that? Because the banks are under government control. These incidents occur because there is no true owner to seek a fundamental solution.

Most banks in Korea are under government control. In effect, they can be considered public enterprises. That is because the government plays the role of the real owner in bank management. Since banks are under government control much like local community service centers, the way they operate becomes bureaucratic and document-centered. They focus on complying with government guidelines and formalities, rather than having a managerial mindset centered on serving financial consumers.

From the government’s standpoint, it may be convenient to keep banks under control as subordinate institutions. It is easier to appoint or manage executives, including bank presidents, and easier to make banks operate in line with government policy. Of course, the political sphere may also find it inconvenient if banks were independent private companies. It would become harder to place politicians in financial firms, and harder to gloss over financial incidents when they occur.

Trust is the core of finance. Credit as a brand is extremely important, but even when incidents occur, people tend to dismiss them with the thought that, since these are government-run public enterprises, that is just how things are. Consumers are indifferent, thinking that the government will bear the responsibility anyway and that they themselves will not suffer any harm.

Each bank should have its own unique characteristics and points of differentiation so that consumers can choose among them. But is that really the case with our banks? Consumers do not feel any meaningful differences between one bank and another. They regard them as little more than government offices located throughout their neighborhoods.

Consumers should be able to choose the bank that serves them better. For that to happen, banks must be able to create their own distinct strengths and promote them to consumers. But the fact that banks are seen as interchangeable, without clear differentiation or competitiveness, is lamentable for the banks themselves as well. From the government’s standpoint, rather than allowing such differences and diversity, it may be more convenient to make them uniform and easy to manage. The low competitiveness of banks can be seen as the result of bureaucrats pursuing their own convenience through the power of financial supervision.

The problem is that if finance does not function as finance should, the economy cannot operate properly. The role of finance is critically important. The world is too complex and our economy too advanced for finance to remain satisfied with merely serving as a funding window for the government. Finance must be able to strengthen its competitiveness in line with other sectors. To do so, it must become not just financial institutions but financial enterprises. As financial institutions under government control, they will have difficulty securing competitiveness in the global market. They must be reborn as financial enterprises managed according to private-sector principles and oriented toward consumers. That is impossible under management that looks to the political sphere or remains subject to bureaucratic control.

Real privatization must take place so that banks can move beyond the level of public enterprises and operate as private banks. First, the owners of banks must be private actors. The government must give up its bank shareholdings and management control, including in the Korea Development Bank. It must then sell its shares to the private sector. Anyone should be allowed to purchase shares in banks, and there should be no ownership cap. Only then can banks escape government control and truly become banks owned and run by the private sector. Next, financial supervision must be modernized. The function of financial supervision must not be used to enforce government policy or to make government control easier. What is needed is more advanced financial supervision that enhances consumer rights and convenience.

When banks break free from government control, they will secure competitiveness as financial enterprises. Consumers and the public will enjoy the benefits.

Sung-no Choi

President, Center for Free Enterprise (CFE)

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Original title: 은행이 정부통제에서 벗어날 때

Author: Sung-no Choi

Date: 2022-09-13

Source: https://www.cfe.org/bbs/bbsDetail.php?cid=press&idx=24956