[Inside Chodong] The 'Easy Path' Taken by the Financial Sector and Kim Byung-hwan's Harsh Criticism

Kim Byung-hwan, the Chairman of the Financial Services Commission, who started his duties in July without even holding an inauguration ceremony, paid special attention to the schedule of the ‘Financial Sector Relay Meetings.’ During the eight meetings he held, he met with CEOs and delivered harsh criticisms as if he had made up his mind. He pointed out that the financial sector had chosen the relatively ‘easy path,’ focusing only on creating short-term performance to show immediate results, and had undermined its own trust through issues such as incomplete sales, deteriorating soundness, project financing (PF) failures, and unfair loans.

At a meeting with bank CEOs, he remarked, “We need to reflect on whether we are innovating as fiercely as general companies.” When meeting with CEOs of savings banks, he mentioned, “It is necessary to consider whether the current difficulties are the result of choosing the easy path by relying on the real estate market rather than innovation efforts.” At the securities firms’ CEO meeting, he evaluated, “Although the scale has grown considerably, there are shortcomings in the securities firms’ fundamental role of supplying venture capital.”

There is a good reason why Chairman Kim delivered such harsh words to the financial sector. The lack of competitiveness and sustainability in the financial industry has been a long-standing issue, but there has been no noticeable change. In the case of domestic financial holding companies, total assets have grown to 3,600 trillion won (as of the first half of 2024), but their value-added contribution to the gross domestic product (GDP) remains around 5%. This means that despite their size, their positive impact on the national economy is minimal.

This is also confirmed by evaluations from domestic and international experts. In 2022, the Korean Finance Association surveyed 510 economic experts, including professors, researchers, businesspeople, and financiers, about the competitiveness of the domestic financial industry. The survey results showed that 9 out of 10 respondents (89.6%) still considered competitiveness to be low. They cited the reasons as ‘a closed culture focused on the domestic market and outdated internationalization of financial companies.’

The views of international organizations and institutions are not much different. According to the International Monetary Fund (IMF), Korea’s financial development ranking (2018) was 8th in the world, while the World Economic Forum (WEF) ranked Korea’s financial competitiveness 18th, and the Swiss International Institute for Management Development (IMD) placed Korea’s financial market efficiency at 30th. In the global rankings announced by the UK financial magazine The Banker, no major Korean financial group made it into the top 50 (2023).

The de facto monopoly structure that the financial sector has enjoyed so far is likely to become a fatal weakness in the future. In the case of banks, if loan demand decreases due to the now ‘constant’ low growth, the interest income-based revenue structure will inevitably weaken. Furthermore, low growth causes a contraction in corporate activities and weakens banks’ role as financial intermediaries, which in turn leads to further contraction in corporate activities. As low birth rates and aging shrink household savings, the deposit base deteriorates, and the stability of the funding structure inevitably declines. Moreover, the global ‘Big Blur’ phenomenon, where financial and non-financial sectors converge bidirectionally, signals an increase in competitive intensity.

Despite the strong demand for innovation, the financial sector habitually complains, “The government controls everything, so there’s nothing we can do.” They also criticize the financial authorities’ various measures to curb household debt and prevent the recurrence of financial accidents as excessive interference. At the same time, they complain that the number of financial companies has become too large as a result of the government lowering the barriers to entering the financial industry to promote competition. This reflects a mindset that wants to avoid competition and regulation while refusing to be checked and supervised.

Will financial companies, which have been complacent with the ‘domestic market,’ have the capability and will to restore the damaged trust and build sustainability going forward? Although it has not received much attention, it is hoped that the Chairman of the Financial Services Commission’s harsh words will lead to some form of change.