[Initial Perspective] At the 'Boundary' Between Financial System Delay and Development

Growth and development take a long time, but destruction happens in an instant. This is evident even when looking at what has occurred in the financial sector during the first third of 2024.

The financial sector has been plagued with negative issues from the start of the year, including the large-scale loss incident involving Hong Kong H-Share Index (Hang Seng China Enterprises Index·HSCEI) equity-linked securities (ELS), the real estate project financing (PF) crisis, the Saemaeul Geumgo ‘work loan’ scandal, embezzlement and breach of trust cases involving employees of commercial banks, and the leak of internal information by a senior official at the Financial Supervisory Service.

The Hong Kong ELS incident once again confirmed the banking sector’s poor internal control systems and the financial authorities’ inadequate supervision. The real estate PF problem, which intensified starting with the Taeyoung Construction workout incident, revealed how excessive borrowing practices in real estate development and the greed of financial institutions increase uncertainty. The Saemaeul Geumgo work loan scandal and the breach of trust and embezzlement cases involving commercial bank employees, which surfaced during the 22nd general election, exposed the reality of illegal lending and moral hazard in the financial sector.

All these incidents are ongoing, and disputes among stakeholders could escalate into larger systemic problems at any time. Even if the crisis is barely overcome, damage to ‘trust’ and scars are inevitable. In fact, the issuance amount of ELS in the first quarter of this year was 4.0539 trillion won (Korea Securities Depository), a decrease of more than 46% compared to 7.5512 trillion won in the fourth quarter of last year. The PF market crisis, which the financial authorities are struggling to contain, has shifted from April to May.

Like a worn-out clich?, this series of incidents once again points to the sluggishness of the financial system. The regulations and systems that seemed tight were powerless against the bad choices of a few. We often forget that it took only 15 months for Lehman Brothers, with nearly 160 years of history, to go bankrupt, and that the downfall of Fannie Mae and Freddie Mac, which grew by focusing on mortgage loans, was also swift.

Of course, the financial sector has not been all dark. On the other hand, efforts by some to build a better financial system and cooperation among stakeholders have continued. Although not receiving much attention, there have been breakthroughs to resolve long-standing issues, ultimately enhancing financial consumers’ benefits, patching system vulnerabilities, and eliminating blind spots.

The Fair Finance Promotion Committee, led by Kim Mi-young, Director of the Financial Consumer Protection Department at the Financial Supervisory Service, recently created ‘common document standards’ to simplify the inheritance property settlement process and proposed a plan to allow workers to directly claim corporate group insurance benefits. These tasks had been neglected because they did not bring significant profits to individual financial companies, but the Financial Supervisory Service succeeded in gaining cooperation from commercial banks, mutual finance institutions, and insurance companies.

The committee also worked to reduce financial consumers’ burdens by improving early repayment fees on loans from the secondary financial sector to a cost-based system, and addressed unfair operational practices in settlement agreements concluded between insurance companies and financial consumers. It continues to pressure the financial sector to ease debt collection on victims of coercion and fraudulent loans.

Although it has not attracted public attention, Financial Services Commission Chairman Kim Joo-hyun is passionately pursuing the ‘Financial-Employment Integrated Support’ project, which links finance and employment. He is reportedly so proactive that he frequently requests media and industry attention for the project. His intention is to create a fundamental framework where finance can expand further by intersecting with employment and welfare, beyond simple support for low-income finance.

Bad things repeat by feeding on weaknesses such as narrow-mindedness, greed, and entrenched practices. In contrast, good things require small, gradual efforts and long-term dedication. It is regrettable that the fruits of improvement and development are overlooked, hidden behind the sluggishness of the system.