[Financial Sector Bruised by Populism] Financial Pledges Detached from Reality... Chronic Issue Every Election

Political Sphere's 'Financial Firm Squeeze' Approaches Elections
Populist Financial Policies Likely to Distort Market
Despite Criticism of Contradicting Market Logic, Some Legislation Enacted

[Asia Economy Reporter Song Seung-seop] With the presidential election just 10 months away, financial companies are once again trembling at the specter of ‘populism.’ Every election season in the past has seen populist financial legislation that disregards reality, and this year, the likelihood of a flood of vote-catching bills justified by COVID-19 and strong corporate earnings is even greater. Although these populist bills ostensibly aim to ease the financial burden on ordinary citizens, there is growing concern that they will distort market order and produce adverse effects that harm financial consumers.

Populism Unleashed Under the Pretext of COVID-19

Financial legislation from the political sphere has accelerated since the launch of the 21st National Assembly, centered around the ruling Democratic Party of Korea. From populist bills such as lowering the legal maximum interest rate, debt forgiveness laws, interest suspension laws, and profit-sharing systems to various regulatory legislations like punitive damages and amendments to the Insurance Business Act known as the Samsung Life Insurance Act, efforts are being pushed forward or discussed. Financial companies, burdened by various COVID-19-related claims, are worried about the side effects of excessive regulation and populism but have yet to find clear countermeasures.

In fact, financial pledges made by the Moon Jae-in administration are being realized one after another under the banner of protecting ordinary citizens, despite criticism that they contradict market logic. A representative example is the reduction of the legal maximum interest rate. The legal maximum interest rate will be lowered from 24% to 20% per annum starting July 7. The legal maximum interest rate has been reduced from 39% in 2011 to 34.9%, then to 27.9% in 2016, and 24% in 2018. Candidates in the 2017 presidential election pledged to lower it to 20%, and it was enacted. Initially, financial authorities opposed this, citing concerns that some low-credit borrowers might be pushed into illegal private loans due to inability to obtain loans from financial companies, but they reportedly yielded to political pressure. Additionally, Gyeonggi Province Governor Lee Jae-myung proposed last year lowering the legal maximum interest rate to around 10%, and Democratic Party lawmaker Kim Nam-guk also introduced related legislation.

Lowering card fees is also considered a typical populist bill. Card fees were supposed to be recalculated every three years based on eligible costs (cost price) since 2007, but they have been lowered regardless during every election. In 2017, presidential candidates pledged to reduce card fees, leading to further reductions and the introduction of related bills. This year, with recalculation approaching, the prevailing view is that the trend will continue downward.

Pressure on financial companies from the political sphere has become more blatant since COVID-19 last year. After the crushing defeat in the April 7 by-elections, some within the ruling party claimed that the Bank of Korea did not inject enough money and that commercial banks failed to provide loans to ordinary citizens, leading to the by-election loss. On the 28th of last month, the ruling party’s floor leader even raised the idea of pardoning credit delinquents. A financial industry insider expressed concern, saying, “The recent profits banks have earned occurred under the special circumstances of COVID-19, so conservative capital management is necessary to respond to uncertainties, but they are being mobilized for government and political parties’ populist policies.”

Election Season Repeats Pledges and Bills Ignoring Market Logic

Financial sector anxiety is growing ahead of next year’s presidential election. This is because populist bills and pledges aimed at winning votes have been issued indiscriminately by both ruling and opposition parties every election season. During the fiercely contested 18th presidential election in 2012, then Saenuri Party candidate Park Geun-hye pledged to create a ‘National Happiness Fund’ worth 18 trillion won to have financial companies purchase delinquent loans. For high-interest borrowers with rates in the 20-30% range, she promised to allow refinancing with loans at around 10% interest up to a limit of 10 million won per person. Her rival, then Democratic United Party candidate Moon Jae-in, proposed the so-called Pieta Three Laws (Interest Rate Restriction Act, Fair Lending Act, Fair Debt Collection Act) to lower the interest rate ceiling in the financial sector. He also pledged to convert mortgage loans from variable interest and short-term lump-sum repayment to fixed interest and long-term installment repayment.

As the election approached, politicians sought to gather votes by breaking down the boundaries of the private sector and pressuring the government under the guise of ‘collecting and adjusting public sentiment,’ but criticism was fierce. Even during the 18th presidential election, there were many cases where private financial companies handling products were forced to provide unilateral support without any incentives, leading to criticism of financial sector strangulation. There were also strong voices warning that indiscriminate debtor forgiveness policies could lead to moral hazard later.

During the 19th presidential election, unrealistic financial pledges were also indiscriminately issued. Most candidates from both ruling and opposition parties agreed to lower the maximum interest rate to 20%. Justice Party candidate Sim Sang-jung promised to reduce check card fees to 0% and establish a 1% cap on card fees. Democratic Party presidential candidate Lee Jae-myung proposed forgiving 5 million won per person for 4.9 million financially vulnerable people.

Professor Kim So-young of Seoul National University’s Department of Economics criticized, “Financial companies will suffer profit losses due to political risks, but it will be difficult to clearly grasp this. It is unjustified to approach this with the mindset that banks easily make money and therefore should be given discounts on everything.”