Government Eases Regulations, Private Sector Circulates Capital... Advanced Economies Shift Capital Flows [Productive Finance Transformation] ②

Explosive Interest in Productive Finance After the Global Financial Crisis
Government Eases Regulations, Banks Actively Invest in Productive Sectors
JP Morgan Plans Massive 1.5 Trillion Dollar Investment in Advanced Industries

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 identified as excessive real estate financing by the financial sector. Critics point out that financial companies are not supplying funds to productive sectors such as corporations or high-tech industries, but are instead focusing on non-productive areas like real estate-backed loans, which has led to an oversupply of credit in the market and fueled 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 companies have begun to reflect and shift toward productive finance. In South Korea as well, there are growing calls that for productive finance to take root, policy support from the government and political circles, as well as a change in the mindset of financial companies, must occur together.

As the Lee Jaemyung administration pushes forward with the great transition to productive finance, major developed countries such as the United States, Europe, Canada, and Japan are also increasingly focused on the efficient allocation of capital by the financial sector. Overseas, the 2008 global financial crisis prompted a fundamental reassessment of bank business practices centered on real estate-backed loans, and substantial changes have since been observed in the field.

Spread of 'Productive Finance' After the Global Financial Crisis

According to the International Finance Center, productive finance in advanced economies is being promoted through a model in which policy finance institutions take the lead and private finance participates. Governments are actively working to improve financial regulations, and banks are investing in productive sectors by utilizing securitization transactions and corporate venture capital (CVC), among other methods.

In the United States, capital adequacy regulations for large banks, which were tightened after the 2008 financial crisis, have been relaxed, leading to more active investment. The Trump administration eased various capital regulations imposed on banks after taking office, and this year, the Federal Reserve also revised the supplementary leverage ratio (SLR) standards applied to large banks, reducing capital burdens for banks and their subsidiaries. As a result of these regulatory relaxations, the common equity tier 1 (CET1) capital requirements for U.S. banks are expected to decrease by up to 14 percent, and the additional asset management capacity available for lending and capital market activities is estimated to reach approximately 2.6 trillion dollars (3,745 trillion won).

After the government's announcement of regulatory easing, JP Morgan, the largest bank in the United States, announced on the 13th that it would make a massive investment totaling 1.5 trillion dollars (about 2,160 trillion won) over the next decade to support the country's key industries. JP Morgan plans to provide direct and indirect funding to four core sectors: defense and aerospace, advanced technology (such as artificial intelligence and quantum computing), energy technology (such as batteries), and supply chain and advanced manufacturing.

The company initially planned to support about 1 trillion dollars for customers in critical industries over the next 10 years but increased the amount by 50 percent. JP Morgan stated that the companies targeted for investment would mainly be headquartered in the United States. Jamie Dimon, Chairman of JP Morgan, emphasized, "It has become clear that the United States has been excessively dependent on unreliable sources for minerals, products, and manufacturing essential to national security," adding, "The United States needs faster action and greater investment."

Europe, Canada, and Japan: Policy Finance-Led 'Productive Capital Flows'

In Europe, productive finance is being promoted through a system in which policy finance institutions take the lead and private finance participates. The European Investment Bank (EIB), the policy finance institution of the European Union, launched the 'European Tech Champions Initiative (ETC),' a fund of funds to support advanced technology companies in the later stages of growth, together with five member states in 2023. By October last year, the EIB had provided 2 billion euros (3.34 trillion won) to eight funds, attracting a total of 10 billion euros (17 trillion won) from both public and private sectors.

In May, the United Kingdom announced that it would invest 600 million pounds (1.15 trillion won) in the energy company Iberdrola to improve the national power grid through the National Wealth Fund. Commercial banks also joined in, agreeing to provide a total of 1.35 billion pounds (2.6 trillion won). In Canada, as the country embarks on large-scale national projects to reduce dependence on the United States and promote growth and job creation, major banks such as the Bank of Montreal (BMO) and Royal Bank of Canada (RBC) have also expressed their intention to provide funding.

In Japan, financial institutions are expanding CVC investments through subsidiaries to support innovative startups that lack collateral and have unstable cash flows. The Financial Services Agency, Japan's financial supervisory authority, has actively pursued policies to expand productive finance and strengthen the financial intermediation function of regional financial institutions by overhauling its supervisory approach. In particular, the agency has simplified its traditional asset soundness-focused inspection methods and shifted toward evaluating not only profitability but also contributions to the regional economy. This is part of regulatory relaxation measures aimed at encouraging productive finance.

Hwang Wonjeong, Senior Research Fellow at the International Finance Center, stated, "Expanding productive finance in the banking sector can not only boost economic vitality but also mitigate economy-wide risks stemming from the concentration of funds in real estate." He emphasized, "To redirect capital flows toward productive sectors, both policy incentives from authorities and voluntary efforts by the banking sector are required, and balancing financial stability with economic growth is a key challenge."