Financial Firms Hobbled by Regulation Face a Bleak Future

Interference in financial firms is increasing. The Financial Services Commission recommended limiting the dividend payout ratio to within 20% of net income in order to absorb losses resulting from COVID-19.

In addition, numerous regulatory bills are being introduced, including an amendment to the Banking Act that would force banks to reduce not only interest but even principal, as well as the profit-sharing system.

The restriction on the dividend payout ratio is said to be a measure to strengthen loss-absorbing capacity, since it is difficult to assess the scale of losses or bad debts arising from the deferment of small business owners’ repayment of loan principal due to COVID-19.

The Financial Services Commission took this step based on the fact that the European Central Bank (ECB) also recommended that European Union (EU) banks pay dividends only within 15% of net income until the end of the year, as well as on stress tests based on an “L-shaped” prolonged recession scenario.

However, it is questionable whether reducing dividends will actually increase banks’ reserves. From the banks’ perspective, they must spend the funds secured by cutting dividends on other purposes the government wants.

This is because they must make up for losses caused by policies such as the profit-sharing system, the amendment to the Banking Act, and the Financial Consumer Protection Act. In the end, they are placed in a position where they must compensate for losses caused by the government’s loan regulations and profit-sharing system.

Furthermore, shareholders of financial companies have been harmed by intervention from the government, a third party. When private companies listed on the stock market share their performance with shareholders, government interference and forcing them to use those funds for other purposes is nothing more than excessive control.

An even bigger problem is that strengthened financial regulation is increasing distrust of Korea’s financial market as a whole. Even though the annual net profit of Korean financial companies in 2020 increased by 7% from the previous year, stock prices showed a downward trend. The Global Financial Centres Index (GFCI), which indicates the financial competitiveness of cities, shows Seoul falling from 7th and Busan from 24th in 2015 to Seoul 25th and Busan 40th in 2020.

By contrast, Singapore, which has established itself as a financial hub in Asia, is taking a different path. Singapore has kept its tax burden and regulations lower than those of other countries and provided institutional incentives for domestic and foreign financial firms to enter and grow. As a result, it was able to rank 5th in the world in the 2020 Global Financial Centres Index.

Singapore’s case carries important implications. Like Singapore, Korea’s financial supervisory authorities should also focus on their proper role: setting soundness standards for financial companies and monitoring whether they comply with them. Rather than directly controlling the financial sector through unnecessary interference, they should make it possible for management to enhance competitiveness. Only then can both the soundness and development of financial companies be achieved.

As the impact of COVID-19 continues and the digital transformation of the financial sector accelerates, uncertainty in the financial market is greater than ever. For the development of Korea’s economy and the stability of the financial market, the direction we should pursue is the flexibility to respond quickly to crises and the “freedom to do business,” which enables firms to strengthen their own competitiveness.

Sung-no Choi, President of the Center for Free Enterprise (CFE)

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Original title: 금융 규제에 발목 잡힌 금융기업, 미래가 어둡다

Author: Sung-no Choi

Date: 2021-03-04

Source: https://www.cfe.org/bbs/bbsDetail.php?cid=press&idx=23545