[Editorial] Misguided ‘visible hand’

For South Korea’s commercial banks, things couldn’t have been better last year. As the Bank of Korea kept raising benchmark rates, higher interest rates led to bigger profits linked to loans to individual and corporate borrowers. More customers also rushed to set up savings accounts offering higher interest rates.

Favorable market conditions based on the wider gap in deposit and lending rates resulted in outsized profits, a reason that commercial banks are celebrating themselves with huge bonuses for 2022.

NH NongHyup Bank decided to offer a 400 percent bonus to employees on top of their basic salary. Shinhan Bank set the bonus rate at 361 percent. KB Kookmin Bank opted for a bonus of 280 percent, in addition to a separate incentive of 3.4 million won ($2,730) to each employee. Hana Bank and Woori Bank are also considering higher performance-based bonuses for higher revenue recorded last year.

The continued COVID-19 pandemic forced individual households and corporations to seek more loans from banks to stay afloat. The Bank of Korea raised the benchmark rate in steps from a record low of 0.5 percent in August 2021 to 3.25 percent in December last year, seeking to rein in inflation.

The mix of rising interest rates and stronger demand for loans apparently benefited the bottom lines of the five major commercial banks. KB Kookmin Bank, Shinhan Bank, Hana Bank, Woori Bank and NH NongHyup Bank combined to post 11.2 trillion won in net profit during the January-September period last year, up 18 percent from a year earlier.

Sharing profits with employees in the form of yearly bonuses is nothing new. In fact, this type of reward is necessary to motivate workers in line with free market principles -- as long as profits are generated through technological and marketing innovation.

In the case of commercial banks here, the way they generate profits is fairly removed from other economic sectors dictated by fiercely competitive market rules. After all, banks are strictly controlled by the government and their profits are subject to financial regulatory measures and benchmark interest rates.

In other words, if the government had taken proper regulatory steps and played a supervisory role, banks would not have been able to get away with massive profits that they do not deserve.

As experts point out, the blame should be partly placed on financial authorities, which failed to recognize the consequence of their misguided measures in advance. At the peak of a savings account campaign in November last year, commercial banks launched products with annual interest rates over 5 percent, drawing in a record number of customers who found no alternative place to invest their money amid the slump-laden stock market. Alarmed by the development, financial authorities advised banks to refrain from raising interest rates on savings accounts in the name of stemming the hike in savings rates from pushing up lending rates.

Yet the move was not only misplaced, but also shortsighted. Banks selectively followed the advisory by sharply cutting interest rates for savings accounts without doing the same for lending rates. Last week, mortgage rates at commercial banks ranged between 5.27 percent and 8.25 percent. The latest rate of over 8 percent marked an upward trend, despite relatively stable rates that guide banks’ lending rates. In contrast, banks in recent weeks kept cutting rates for savings accounts to the 4 percent range, and some products fell even to the 3 percent range.

Commercial banks are duly under criticism for taking easy profits by exploiting the gap between deposit and lending rates. Those who expect higher income from savings accounts are disappointed to see their interest income decline, even as benchmark rates are rising. The Bank of Korea is widely expected to raise rates by a quarter percentage point to 3.5 percent on Friday, in line with the continued rate hikes of the US Federal Reserve this year.

As criticism has mounted, the Financial Supervisory Service called on banks to refrain from raising lending rates too much. Financial authorities should reconsider their inconsistent “visible hand” that has only deepened uncertainty in the market and allowed banks to unfairly take huge profits -- while individual and corporate lenders are suffering from rising debt financing costs.