Ruling Party Mentions 'Interest Stop Rule'
Pressure Including Store Closures and Dividend Reductions
[Asia Economy Reporter Kiho Sung] As the ruling party strongly pushes for a profit-sharing system related to the novel coronavirus infection (COVID-19), tension is rising in the financial sector. The scope of the profit-sharing system has expanded from the initially mentioned platform companies to include the financial sector, putting it at risk of forced mobilization. Although the ruling party claims it is a 'voluntary participation,' it is not easy to refuse if the government and ruling party, who hold the regulatory power, apply pressure. Moreover, financial authorities have increased the threshold for bank branch closures and even recommended dividend cuts, intensifying management pressure. Some voices criticize that the government and ruling party are excessively interfering in the management of private financial companies.
According to political and financial circles on the 20th, Hong Ik-pyo, chairman of the Democratic Party Policy Committee, appeared on a radio broadcast the previous day and argued, "The biggest industry benefiting even during the COVID-19 situation is the financial industry, so instead of just reducing rent and stopping, the interest from banks should also be stopped or limited." Hong reiterated the 'Interest Stop Act,' saying, "If necessary, it should be considered even through a temporary special law."
This is interpreted as part of the profit-sharing system promoted by the ruling party. Initially, the profit-sharing system targeted platform companies such as online shopping and food delivery, which saw a surge in demand due to COVID-19. However, during the first meeting of the Post-COVID Inequality Resolution Task Force (TF) on the 15th, the Democratic Party raised the claim, "Did credit card companies also benefit from fees due to COVID-19 disaster relief funds?" expanding the scope to the financial sector.
This is not the first time the political sphere has twisted the financial sector's arm citing COVID-19. Last month, at a 'Financial Industry Video Conference for Cooperation in Securing COVID-19 Hospital Beds' held in the National Assembly, Lee Nak-yeon, the party leader, requested commercial banks to "pay attention to easing the interest rate spread," which sparked controversy over government intervention. In the same month, Democratic Party lawmaker Jeon Yong-gi also introduced bills to amend the Banking Act and Specialized Credit Finance Business Act, granting landlords who reduced rent the right to request interest rate cuts. Gyeonggi Province Governor Lee Jae-myung advocated last August to cap the maximum interest rate at 10%.
The pressure from financial authorities on the banking sector is also increasing. Eun Sung-soo, chairman of the Financial Services Commission, stated at an online pre-briefing on the financial commission's work plan for this year held at the Seoul Government Complex in Gwanghwamun the previous day, "Considering all temporary financial support measures such as maturity extensions, repayment deferrals, and financial regulation flexibility across the financial sector, it seems inevitable to extend them." Commercial banks have opposed interest repayment deferrals due to concerns about the proliferation of marginal companies and credit risks. However, as the extension of interest repayment deferrals is being finalized, banks have no choice but to bear the bad debts.
Closing bank branches, one of the important business strategies for banks, is also becoming difficult. The Financial Supervisory Service, through a prior notice of the 'Banking Supervision Implementation Rules Amendment,' stipulated that banks must report the results of impact assessments involving external experts to financial authorities every three months if they intend to close branches. The threshold for branch closures, which previously only required internal impact assessments under bank self-regulation, is significantly raised. While banks agree with concerns that financial accessibility for the elderly and vulnerable groups may decrease, dissatisfaction with excessive government intervention is widespread. Additionally, authorities are recommending financial holding companies reduce their year-end dividend payout ratios. Although the intention is to reduce dividends and accumulate cash in preparation for the COVID-19 aftermath, it has become a controversial issue regarding shareholder value damage.
The financial sector is worried that the continuous regulatory pressure from authorities and politicians may materialize into actual policies. There is also dissatisfaction that the government and ruling party's arm-twisting is excessive, especially after being forcibly mobilized into securities and bond market stabilization funds, green finance, and New Deal funds, as well as the principal and interest repayment deferrals for self-employed and small businesses following COVID-19.
A bank official said, "It is difficult to openly oppose government policies," adding, "Especially in the case of the profit-sharing system, there is a risk of breach of fiduciary duty by management, so it is not easy to comply." Another financial sector official expressed concern, saying, "While it is the role of financial companies to support and participate in various policies during crises, recently it has been excessive," and "The risks associated with forced mobilization are considerable."
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