[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 Contributions"
"Need for Regional Bank-Favored Criteria and Participation of Mutual Finance Institutions"
Interest Rate Competition Expected to Intensify Alongside Cooperative Project Funding

This year, the contract periods for 'treasury manager' agreements-covering the management of budgets for 68 local governments and 9 education offices-expired, prompting new treasury 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. In particular, NH Nonghyup Bank accounted for 42% of the treasury contracts this year. This has sparked criticism that the selection criteria are designed to favor commercial banks such as Nonghyup Bank, while others argue that it is only natural for Nonghyup Bank to have an advantage, given its role in providing financial convenience in local areas. There are also calls to revise the criteria to allow regional banks and mutual finance institutions, which are more closely connected to their communities, to participate in the competition.

All Existing Banks Retain Treasury Status This Year, Except for Second Treasury of Bucheon City in Gyeonggi Province

According to a comprehensive investigation by The Asia Business Daily on December 11, the treasury selection process for 68 local governments (including both metropolitan and basic municipalities) and 9 education offices has been completed, except for the North Gyeongsang Provincial Office of Education. Out of 119 treasuries (with the first and second treasuries of the same local government counted separately), Nonghyup Bank secured 69, accounting for 42% of the total. This was followed by Kwangju 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, except for the North Gyeongsang Provincial Office of Education, all 8 (Gyeonggi, Gyeongnam, Daejeon, Ulsan, Incheon, Jeonbuk, Chungnam, Chungbuk) once again selected Nonghyup Bank as their treasury manager.

By region, Nonghyup Bank secured treasuries evenly across most areas except for Gwangju. Specifically, in Gangwon Province, 4 treasuries (Nonghyup 3, Shinhan 1); Gyeonggi Province, 9 (Nonghyup 7, Kookmin 1, Industrial Bank 1); Gyeongnam Province, 12 (Nonghyup 6, Kyongnam 6); North Gyeongsang Province, 12 (Nonghyup 7, iM 3, Shinhan 1, Kookmin 1); Gwangju, 4 (Kwangju 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 Province, 22 (Nonghyup 12, Kwangju 10); North Jeolla Province, 17 (Nonghyup 9, Jeonbuk 8); Chungnam Province, 3 (Nonghyup 2, Hana 1); and Chungbuk Province, 8 (Nonghyup 6, Shinhan 2) had their treasuries determined.

Local governments manage their revenue budgets by depositing them in accounts at one or two financial institutions, and treasury contracts are renewed every 3 to 4 years according to local ordinances. Each local government’s Treasury Designation Review Committee selects the treasuries, generally following the Ministry of the Interior and Safety’s guidelines, though detailed criteria may vary by municipality.

Treasury Designation Criteria: A 'Tilted Playing Field' Favoring Commercial Banks

Not only this year’s results, but the treasury market in general has long been dominated by commercial banks, especially Nonghyup Bank. According to data on local government treasuries (including education offices) received by Assemblywoman Song Okju of the Democratic Party of Korea from each bank, as of September this year, Nonghyup Bank managed 204 out of 305 treasuries nationwide. This represents about two-thirds (approximately 67%) of all treasuries. All commercial banks combined (excluding iM Bank) held 268 treasuries, or about 88%. In terms of deposited funds, out of a total of approximately 612 trillion won, Nonghyup Bank was responsible for 420.45 trillion won, accounting for 68.72% of the total, while commercial banks collectively held 546 trillion won (89% of the total).

The reason commercial banks have been able to secure most treasuries is attributed to selection criteria that are said to be designed in their favor. The Ministry of the Interior and Safety’s evaluation items and scoring standards for local government treasury designation are largely divided into: ▲ the financial institution’s internal and external credit rating and financial stability; ▲ loan and deposit interest rates for the local government; ▲ convenience for local residents; ▲ treasury work management capabilities; ▲ contributions to the local community and cooperative projects with the local government; and ▲ other factors. Of these, 'internal and external credit rating and financial stability' is allocated a total of 8 points-4 points for international credit rating agencies and 4 for domestic ones. Regional banks, with their relatively smaller asset sizes, are inevitably at a disadvantage in international credit evaluations. In addition, Nonghyup Bank is considered to have an advantage in the areas of convenience for local residents and community contribution. The criteria for counting the number of local branches vary by municipality, and in the case of Nonghyup Bank, the number may include not only bank branches but also unit cooperatives classified as mutual finance institutions.

Nonghyup Bank Provides Financial Convenience Throughout Local Regions

There are, of course, 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 the local community is inevitably greater than that of other banks. Thus, its selection as a treasury manager is seen as a result of efforts to expand local financial accessibility and contribute to the community. As of the third quarter of this year, Nonghyup Bank operated 1,064 branches, which is 393 more than the average of 671 branches among the other major commercial banks (Kookmin, Shinhan, Hana, Woori). Nonghyup Bank’s share of branches outside the Seoul metropolitan area is about 63%, compared to an average of 33% for its peers. A senior official at Nonghyup Bank stated, “Other commercial banks often withdraw local branches for cost reasons, but Nonghyup Bank maintains branches in most regions. In addition, we have consistently engaged in community contribution activities for 3 to 4 years, and since external evaluators objectively participate in treasury review committees, fair evaluations are inevitable.”

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

There are growing calls for not only competition among commercial banks but also for regional banks and mutual finance institutions, which are rooted in local communities, to be allowed to compete for treasury management. For regional banks, proposals include eliminating international credit rating requirements or strengthening the scoring for convenience for local residents. For mutual finance institutions, it is argued that they should be included in the evaluation for treasury competition from the outset. Under the Local Accounting Act, only banks under the Banking Act can be designated as treasuries, but for special accounts or fund work (second treasuries), mutual finance institutions can also participate. However, many local governments use the Financial Services Commission’s regional reinvestment evaluation results as an 'autonomous item' in their assessments, but mutual finance institutions are excluded from this evaluation. Assemblywoman Song emphasized, “Through regional mutual finance, local treasuries can circulate funds within the community, thereby promoting the local economy and achieving mutual growth.”

Going forward, interest rates are expected to become a key variable in the competition to secure treasury management contracts. After President Lee Jaemyung addressed the issue of local government treasury selection and interest rates in August, a partial amendment to the enforcement decree of the Local Accounting Act was approved at a Cabinet meeting on December 2. The main point is that heads of local governments that switch their treasury banks must disclose the interest rates received from the relevant financial institution. If interest rates are disclosed in addition to the already publicized cooperative project funding, banks may compete more aggressively on interest rates to win treasury contracts. Furthermore, the political sphere has begun discussing raising the weighting of interest rates in the scoring system. In October, Assemblyman Han Byungdo of the Democratic Party of Korea sponsored a bill to amend the Local Accounting Act, which would increase the weighting for deposit interest rates and limit the weighting for cooperative projects.