[Productive Finance Transformation] ④The Key to Overcoming Limitations Lies in 'Credit Assessment Models'... Easing Separation of Banking and Commerce Regulations Also Urgently Needed

Credit Assessment Focused on Financials and Collateral Creates Barriers for High-Tech Industries
Need for Evaluation Models Reflecting Technological Capability and Easing Separation of Banking and Commerce
Easing RWA Regulations Faces 'Practical

Editor's NotePublic dissatisfaction is growing due to the sharp rise in real estate prices. While incomes have stagnated, housing prices have soared, greatly undermining residential stability. The fundamental cause of this instability in the real estate market is said to be the excessive real estate financing by the financial sector. Financial institutions are criticized for focusing funds on unproductive areas such as real estate-backed loans, rather than supplying capital to productive sectors like businesses or high-tech industries. This has led to an oversupply of credit in the market, fueling the rise in real estate prices. The Lee Jaemyung administration has made the 'great transition to productive finance' a core goal of its economic policy based on this awareness of the problem. Overseas, since the 2008 global financial crisis, financial institutions have been moving toward a shift to productive finance, reflecting on their previous practices. In Korea as well, there are growing calls for both policy support from the government and political circles, as well as a change in perception among financial institutions, in order for productive finance to take root.

Since the launch of the new administration, there has been a clear trend among the five major banks to reduce real estate loans and expand corporate lending. However, some point out that simply increasing the balance of loans is not enough to realize the true intent of 'productive finance.' The core of productive finance is to ensure that funds flow into the real economy and future industries, rather than real estate. To achieve this, there is a strong call for a new credit evaluation model that can reflect technological capabilities and innovation, along with the need to ease the separation of banking and commerce regulations that currently restrict industrial investment by financial institutions.

Evaluation Structure Focused on Traditional Industries... Urgent Need for Credit Evaluation Models Reflecting Innovation

Currently, corporate loans are made based on credit evaluation standards developed by each bank. These standards are mainly based on traditional indicators such as financial statements, real estate collateral, and debt ratios. As a result, the main criterion for lending is current financial soundness, rather than technological capability or growth potential.

An officer in charge of lending at a commercial bank said, "Innovative companies tend to have high debt ratios due to large initial investments, and their profits or capital are relatively small. In this structure, it is difficult to get loan approval, and even if approved, the interest rates or credit limits are inevitably unfavorable."

This credit evaluation structure centered on traditional industries poses clear limitations for growth-oriented companies such as high-tech industries, venture companies, and startups.

The banking sector agrees that a new credit evaluation model is urgently needed to reflect the non-financial value of innovative companies in order to spread productive finance. Currently, personal loans are based on credit scores from private credit rating agencies using a personal credit scoring system (CSS), but there are no external credit rating agencies for corporate loans. The credit ratings disclosed when issuing corporate bonds differ in perspective from loan screening and are difficult to apply directly.

As a result, banks have each developed and use their own corporate credit evaluation models. These models aggregate conditions similar to CSS but incorporate financial data, default rates, and industry risks using proprietary formulas. Corporate credit evaluation models reflect each bank's lending policy and risk management capabilities, so they are treated as trade secrets. However, this approach leads to significant disparities between banks, is inefficient, and has limitations in assessing the technological competitiveness or business growth potential of innovative companies.

The financial industry points out that government support is necessary to develop credit evaluation models. An official at a financial holding company said, "Since each bank has different corporate lending policies, it is inefficient to develop credit evaluation models individually. There is a need for a task force at the level of the Korea Federation of Banks, or for a government-funded research institute to propose a common evaluation framework."

'Separation of Banking and Commerce' Hinders High-Tech Investment... Easing Regulations Is Urgent

If the limitations of credit evaluation are the barrier to loans for innovative companies, the separation of banking and commerce regulation is cited as the shackle on industrial investment. The separation of banking and commerce is a system that restricts financial institutions from controlling general companies and vice versa. It was introduced in 1982 due to concerns that if a bank owns a company, it could control management through lending, and if a company owns a bank, it could misuse customer deposits for corporate loans.

However, as industrial structures have rapidly changed over time, there is growing criticism that the separation of banking and commerce regulation now hinders corporate fundraising and financial institution investment. When large-scale investment is required, companies are forced to rely solely on internal reserves or external investment.

Lee Hyoseop, a research fellow at the Korea Capital Market Institute, emphasized, "Due to the separation of banking and commerce regulation, banks and insurance companies can only acquire up to 15% and 20% of voting shares in general companies, respectively. If financial institutions are to invest in innovative industries, easing the separation of banking and commerce is inevitable."

In particular, there are expectations that improving the separation of banking and commerce regulations will first lead to the easing of corporate venture capital (CVC) regulations. Under the current Fair Trade Act, general holding companies cannot have financial subsidiaries. Although it is possible to establish CVCs on a limited basis for new business investment, CVCs under holding companies must be established as wholly owned subsidiaries. In addition, only up to 40% of investment funds can be raised externally. Overseas investment is also limited to around 20% of the total assets of the CVC. This structure is considered a factor that hinders domestic companies in the global venture investment competition.

An official from the Financial Services Commission explained, "Productive finance is not simply about expanding corporate lending instead of real estate loans. Funds must flow into areas that can drive domestic economic growth, such as regional infrastructure development, large corporate facility investment, and acquisition finance, for it to be considered true productive finance."

The financial authorities have also expressed their intent to ease regulations. Lee Eogwon, Chairman of the Financial Services Commission, said at the National Assembly's Political Affairs Committee audit, "As we increasingly face situations that require large-scale investment, there have been calls to rationalize and improve the separation of banking and commerce regulations. We will consult with relevant ministries to devise practical solutions."

Relaxing Corporate Loan RWA Has 'Practical Limitations'... Impact of IMF and Financial Crisis

However, easing the risk-weighted assets (RWA) regulations for corporate loans, which the financial sector has consistently called for, remains practically difficult. The Financial Services Commission has announced some regulatory easing since the launch of the new administration, but most measures have focused on 'invigorating investment.' The RWA for unlisted stocks has been lowered from 400% to 250%, and policy fund investments to 100%, but the RWA for corporate loans will remain unchanged.

An official from the Financial Services Commission explained, "For unlisted stocks or fund investments, we apply even stricter regulations than Basel III, so there is room for relaxation. However, the RWA for corporate loans already meets international standards, so further easing is difficult."

The reason financial authorities are cautious about easing corporate loan regulations is due to the historical background of prudential regulation. RWA regulation is an international standard for managing banks' capital soundness. After the 2008 global financial crisis, the Basel Committee on Banking Supervision (BCBS) strengthened the system by introducing 'Basel III.' Basel III requires a Common Equity Tier 1 (CET1) ratio of 4.5%, a Tier 1 capital ratio of 6%, and a total capital ratio (BIS) of at least 8%. In Korea, even stricter standards have been recommended since 2023, requiring financial companies under bank holding companies to maintain a consolidated CET1 ratio of 12-13% or higher.

The trauma of the International Monetary Fund (IMF) crisis in 1998 also plays a role. At that time, the poor capital structure of banks was identified as a major cause of the foreign exchange crisis, prompting the government to significantly strengthen banks' BIS capital adequacy ratios. The government demanded both capital expansion and a reduction in risk-weighted assets from banks. As part of this, loan screening standards for insolvent companies were significantly tightened. As a result, banks established evaluation systems focused on corporate financial status, repayment ability, and collateral (real estate).

However, there are ongoing criticisms that this conservative structure is now a factor in shrinking loans to innovative industries. The financial industry argues, "Regulations that have been excessively tightened since Basel III are blocking loans and investments in innovative companies," and there are calls for the government to consider broader regulatory easing, not only for unlisted stocks, ventures, and fund investments, but also in other areas.