[Inside Chodong] The Financial Sector Faces the 'Hour of the Wolf'

The financial sector is struggling with a flood of adverse factors. It is difficult to find any positive news amid household debt management, real estate project financing (PF) restructuring, massive losses in equity-linked securities (ELS), rising delinquency rates, increasing non-performing loan (NPL) ratios, and internal issues such as employee embezzlement and improper loans.

Financial authorities are actively requesting cooperation from the financial sector regarding the funding difficulties faced by small and medium-sized enterprises and self-employed individuals, as well as issues related to household debt and real estate PF. At the same time, they are raising the pressure by announcing strong regulations on employee embezzlement cases, improper loans, and delinquency rates.

"Everyone is busy watching each other’s moves." Financial sector insiders met during reporting described their situation this way. They said, "We have to cooperate because government finances are tight, but we wonder what else they will demand..." and deliberately kept their comments brief. Regarding the government's push for soundness enhancement, they evaluated it as "the standards are vague and hard to grasp." If they try to significantly improve indicators such as the Liquidity Coverage Ratio (LCR), the Bank for International Settlements (BIS) capital adequacy ratio, and the NPL coverage ratio to align with the financial authorities’ stance, they risk clashing with shareholders’ interests and thus cannot act rashly.

Moreover, the scope for maneuvering is likely to narrow further due to risks they have brought upon themselves. At least KRW 21 trillion worth of real estate PF exposure projects have been confirmed as distressed, and financial accidents caused by internal control and organizational culture problems, such as employee embezzlement and improper loans, continue unabated. In particular, allegations of improper loans amounting to hundreds of billions of won to relatives of the former chairman of Woori Financial Group have fundamentally prompted a reconsideration of various financial accidents that were previously dismissed as individual deviations.

Financial Services Commission Chairman Kim Byung-hwan and Financial Supervisory Service Chairman Lee Bok-hyun are talking ahead of the government-party meeting on measures to protect financially vulnerable groups and eradicate illegal private loans held at the National Assembly on the 11th. Photo by Kim Hyun-min kimhyun81@

The actions of the financial authorities, the control tower, are precarious, and the outlook is unclear. Uncoordinated messages related to policies on household loans and real estate PF have increased confusion among financial consumers, and the rapidly growing household debt has undermined trust in the policy goal of stable management.

Statements directed at the financial sector from heads responsible for financial policy and supervision include: "The interest burden is increasing due to sustained high interest rates," "Premature expectations of interest rate cuts may worsen household debt," "The rise in loan interest rates is not what the authorities want," "There was no consensus on suspending loans to homeowners," and "It is desirable for banks to manage themselves autonomously." Terms like "confused," "wavering," and "government intervention" have become common epithets attached to these leaders.

Furthermore, despite the perennial topic of strengthening internal controls by the authorities, the financial sector has again this year seen large-scale employee embezzlement and breach of trust incidents, massive improper loan suspicions, and large-scale incomplete sales scandals. Employee embezzlement and breach of trust incidents were confirmed at KB Kookmin Bank and NH Nonghyup Bank, and massive improper loan suspicions at Woori Bank, rendering various promises to prevent recurrence empty words. Additionally, regulatory measures on high-risk derivatives following incomplete sales of Hong Kong H-Index ELS remain elusive.

A former high-ranking official diagnosed the current situation as the financial sector experiencing "delay," while the financial authorities have lost consistency and efficiency in their policies. They also predicted that upcoming external crises might expose structural vulnerabilities. This diagnosis likely comes from extensive experience.

On the 18th (local time), the United States implemented a 'big cut' by lowering the benchmark interest rate by 0.5 percentage points. While this is good news for those awaiting a rate cut, voices interpreting it as a signal of 'economic contraction' are growing louder. At this critical turning point, the financial sector and financial authorities’ actions, which are instead causing controversy, are extremely unsettling. It is a confusing "hour of the wolf," where it is difficult to know whether the outcome will be good or bad.