[Why&Next] Commercial Banks Still Dominate Local Government Treasury Competition

77 Local Governments Face Expired Treasury Contracts This Year
Nonghyup Bank Secures the Majority
Treasury Designation Criteria Criticized as Favoring Commercial Banks
Nonghyup Bank: "A Result of Maintaining Branches and Community Contribut

This year, 68 local governments and 9 education offices reached the end of their contract periods for managing their budgets through designated depository banks, known as “treasury managers,” and initiated new selection procedures. As a result, with the exception of the second treasury of Bucheon City in Gyeonggi Province, which switched from KB Kookmin Bank to IBK Industrial Bank of Korea, most existing banks retained their treasury status. Notably, NH Nonghyup Bank accounted for 42% of all treasury contracts this year. This has sparked debate, with critics arguing that the selection criteria are skewed in favor of major commercial banks such as Nonghyup Bank, while others counter that Nonghyup Bank’s advantage is a natural outcome given its provision of convenient financial services in local areas. There are also calls to revise the criteria to allow regional banks and mutual finance institutions, which have strong local ties, to compete more effectively.

This Year’s Expiring Treasury Contracts: All Existing Banks Retain Status Except for Bucheon’s Second Treasury

According to The Asia Business Daily’s coverage on December 11, the treasury selection process for 68 local governments (including metropolitan and basic municipalities) and 9 education offices was completed this year, with the exception of the North Gyeongsang Province Office of Education. Out of 119 treasuries (with first and second treasuries in the same municipality counted separately), Nonghyup Bank secured 69, accounting for 42% of the total. This was followed by Gwangju Bank (12), Jeonbuk Bank (8), Hana Bank (7), Kyongnam Bank (6), iM Bank (5), Kookmin Bank (4), Shinhan Bank (4), Busan Bank (3), and Industrial Bank of Korea (1). For education offices, all eight (Gyeonggi, Gyeongnam, Daejeon, Ulsan, Incheon, Jeonbuk, Chungnam, Chungbuk), except for North Gyeongsang Province, once again selected Nonghyup Bank as their treasury manager.

Looking at the results by region, Nonghyup Bank secured treasuries evenly across most areas except Gwangju. Specifically, in Gangwon (4 locations: Nonghyup 3, Shinhan 1), Gyeonggi (9: Nonghyup 7, Kookmin 1, Industrial 1), Gyeongnam (12: Nonghyup 6, Kyongnam 6), North Gyeongsang (12: Nonghyup 7, iM 3, Shinhan 1, Kookmin 1), Gwangju (4: Gwangju 2, Kookmin 2), Daegu (3: iM 2, Nonghyup 1), Daejeon (7: Hana 6, Nonghyup 1), Busan (6: Busan 3, Nonghyup 3), Ulsan (4: Nonghyup 4), South Jeolla (22: Nonghyup 12, Gwangju 10), North Jeolla (17: Nonghyup 9, Jeonbuk 8), Chungnam (3: Nonghyup 2, Hana 1), and Chungbuk (8: Nonghyup 6, Shinhan 2), the treasury designations were distributed.

Local governments deposit their revenue budgets in accounts at one or two financial institutions, and treasury contracts are renewed every three to four years according to local ordinances. Each local government’s Treasury Designation Review Committee selects the treasury, generally following the Ministry of the Interior and Safety’s guidelines, though detailed criteria may vary by municipality.

Treasury Selection Criteria: A “Tilted Playing Field” Favoring Major Banks

Not only this year, but historically, the treasury market has been effectively monopolized by commercial banks, especially Nonghyup Bank. According to data from Assemblywoman Song Okjoo’s office, which collected local government treasury status (including education offices) from each bank, as of September this year, Nonghyup Bank managed 204 out of 305 total treasuries. This accounts for about two-thirds (approximately 67%) of all treasuries. All commercial banks combined (excluding iM Bank) held 268 treasuries, about 88% of the total. In terms of deposited funds, Nonghyup Bank managed 420.45 trillion won out of approximately 612 trillion won, representing 68.72% of the total, while commercial banks collectively managed 546 trillion won (89% of the total).

The reason commercial banks have been able to secure most treasuries is attributed to selection criteria that favor them. According to the Ministry of the Interior and Safety’s evaluation items and scoring standards for local government treasury designation, the main criteria include: ▲ the financial institution’s internal and external credit rating and financial stability; ▲ loan and deposit interest rates offered to the local government; ▲ convenience for local residents; ▲ treasury management capability; ▲ contribution to the local community and cooperation with the municipality; and ▲ other factors. Of these, “internal and external credit rating and financial stability” is allocated a total of 8 points, with 4 points each for international and domestic credit ratings. Regional banks, due to their smaller asset size, are inevitably disadvantaged in international credit assessments. Additionally, Nonghyup Bank is seen to have an advantage in the categories of convenience for local residents and contribution to the local community. The method for counting the number of local branches varies by municipality, and in the case of Nonghyup Bank, the count may include not only bank branches but also the number of unit cooperatives classified as mutual finance, further boosting their figures.

Nonghyup Bank Provides Financial Convenience Across Local Regions

Of course, there are counterarguments to the criticism that the system favors commercial banks. In the case of Nonghyup Bank, it provides financial convenience throughout local regions and, as a result, its contribution to local communities is inevitably greater than other banks, making its treasury selection a natural result of expanding local financial access and community involvement. As of the third quarter of this year, Nonghyup Bank operated 1,064 branches, which is 393 more than the average of 671 branches for other major commercial banks (Kookmin, Shinhan, Hana, Woori). Nonghyup Bank’s proportion of branches outside the Seoul metropolitan area is about 63%, significantly higher than the 33% average for other banks. A high-ranking Nonghyup Bank official stated, “While other commercial banks often close local branches due to cost concerns, Nonghyup Bank maintains branches in most regions. In addition, we have consistently engaged in community outreach for three to four years, and external evaluators objectively participate in treasury review committees, ensuring a fair evaluation process.”

“Scoring Should Favor Regional Banks, and Mutual Finance Should Be Allowed to Participate”

Some argue that competition for treasury contracts should extend beyond commercial banks to include regional banks and mutual finance institutions rooted in local communities. For regional banks, proposals include eliminating the requirement for international credit ratings or strengthening the scoring for local resident convenience. For mutual finance institutions, simply being included in the evaluation process for treasury contracts is necessary. According to the Local Accounting Act, only banks under the Banking Act can be designated as treasuries, but for special accounts or fund management (second treasuries), mutual finance institutions are also eligible. However, many local governments use the Financial Services Commission’s regional reinvestment evaluation results as an “autonomous item,” and mutual finance institutions are excluded from this evaluation. Assemblywoman Song emphasized, “Through local mutual finance, local treasuries can circulate funds within the region and grow together with the local economy.”

Going forward, interest rates are expected to become the key variable in the competition to secure treasury contracts. After President Lee Jaemyung mentioned the issue of treasury selection and interest rates for local governments in August, a partial amendment to the Local Accounting Act Enforcement Decree was approved by the Cabinet on December 2. The main point is that heads of local governments who switch their treasury bank must disclose the interest rates received from the respective financial institution. If, in addition to the already disclosed item of cooperation project expenses, interest rates are also made public, banks may enter into interest rate competition to win treasury contracts. Furthermore, political circles have begun discussing ways to increase the weighting of interest rates in the scoring system. In October, Assemblyman Han Byungdo sponsored a bill to amend the Local Accounting Act, which includes increasing the score allocated to deposit interest rates and limiting the score for cooperation projects.