[Editorial] Foster competition

The debt-ridden working poor face growing economic distress brought on by high interest rates.

President Yoon Suk Yeol told a Cabinet meeting last week that small-business owners had said in his town hall that they spend most of their hard-earned money on paying their debt to banks so they feel like they are slaves to banks.

Financial Supervisory Service Gov. Lee Bok-hyun said on Monday, “Banks are likely to reach a record interest income of 60 trillion won ($46 billion) this year. Also in terms of third-quarter operating profits, banks earned more than Samsung Electronics, LG Electronics and Hyundai Motor combined. What innovations did banks achieve, compared with semiconductor and automotive companies, to reap 60 trillion won in interest income?”

He also said that in the United States, banks assume risks from interest rate changes, while in Korea, individuals have to cope with them.

The remarks by the head of the nation’s financial watchdog reflect the rage of the working class pressed down by high interest rates. His words may sound as if they undermine a free market economy that advocates for profit maximization, but there is a point in what he said.

The nation’s five biggest banks -- KB Kookmin, Shinhan, Hana, Woori and Nonghyup -- saw their interest income explode under the Yoon administration. They increased to 29 trillion won in 2021 and 36 trillion won in 2022, and 31 trillion won for three quarters of this year.

Banks attribute this performance to rising interest rates, but few of them could deny that interest income surged thanks to their selfish and easy business method of raising interest rates on loans quickly but rates on deposits slowly.

Domestic banks including provincial and internet banks posted a total of 55.9 trillion won in interest income last year, up 9.9 trillion won from a year earlier. Their total net profits increased 1.6 trillion won year-on-year to 18.6 trillion won. It is only a matter of time before they attain a record net profit this year.

The bank lending-deposit spread, that is the difference between lending interest rate and deposit interest rate, has kept soaring. The average spread for the Big Five banks rose from 1.71 percent in 2020 to 1.95 percent last year to 2.16 percent this year.

Last year the average annual salary of bank employees exceeded 135 million won. Highly paid employees such as branch managers are said to have received more than 800 million won in severance pay. These amounts will likely increase this year.

It is hard to claim that the bank boom is to blame for economic pains of the working class. It is not desirable to demonize banks. And yet it is true that domestic banks are overprotected by the government.

The government has not approved the establishment of a new conventional bank except for internet banks since it licensed the Peace Bank of Korea in 1992. In the Korean bank industry, the barrier for new entrants is almost insurmountable. As a result, banks barely feel the pressure of dealing with competition, and the need to launch innovative services and adjust interest rates to attract customers.

Domestic financial institutions promised a long time ago to strengthen their global competitiveness, but their overseas revenues are insignificant compared with investment banks of foreign countries. Korean banks have got used to profiting from oligopoly.

Banks are routinely criticized for splurging on salary and severance pay with income they earn easily by widening the loan-deposit spread. Windfall tax is often mentioned.

But there have been little changes. More fundamental measures are needed.

The widening interest spread must not be allowed to reach an exploitative extent. Banks must try harder to increase noninterest income and also double their efforts to strengthen overseas business.

Above all, the government must figure out ways to break down the oligopoly and stimulate competition. A catfish is needed to motivate sardines to perform better. Lowering the entry barrier for nonbank entities is a starting point. Also, the government needs to require banks to increase appropriations for bad debts.