[Editorial] Public role of banks

The top four commercial banks in South Korea posted record-breaking profits last year, greatly helped by the wide gap in deposit and lending rates following a steady rise in interest rates amid raging disputes over their “easy” profits and their public role.

Shinhan Bank led the pack by posting 4.64 trillion won ($3.66 billion) in net profit last year, followed by KB Kookmin Bank with 4.41 trillion won, Woori Bank at 3.17 trillion won and Hana Bank's 3.62 trillion won.

The stellar performances of the four major banks were thanks to the upsurge in profits of their businesses handling products linked to interest rates, while other operations such as banking fees shrank.

The banks were quick to raise interest rates for both savings and loans extended to individuals and corporate customers as the Bank of Korea hiked the benchmark interest rate from 1 percent to 3.25 percent over the course of 2022.

This helped banks increase their profits on two fronts. First, higher interest rates of savings and related products drew more individual customers seeking alternative investment tools as the stock market tanked last year. Second, they gained greater profits from loans with rising interest rates.

And there was the controversy over whether the banks had raised rates differently on purpose -- slow for savings and fast for loans -- in a bid to maximize the loan-deposit margin.

This relatively easy way to boost profits invited a flurry of criticism, especially regarding their business practices and public role. While the banks gave out record-high bonuses to employees and offered handsome early retirement packages in line with huge profits, ordinary people and corporations in other sectors struggled to pay higher interest payments.

Nonbanking sectors remained in bad shape last year as the broader economy was stuck in the protracted slowdown initiated by the COVID-19 pandemic and exacerbated by Russia's invasion of Ukraine.

Mindful of such public outcry, banks belatedly put out a host of voluntary measures including share buyback plans for shareholders and social responsibility programs for communities.

Nonetheless, public opinion is still negative about the major banks. A case in point is the banks’ continued cut in staff numbers as well as the shutdowns of branch offices across the nation. According to data from the Financial Supervisory Service, the combined number for 18 banks in Korea stood at 6,195 branch offices in September 2021. The figure was down to 5,855 in September last year, as banks closed 340 branches around the country.

Banks claim that such downsizing of physical offices is inevitable, since digital banking has become mainstream since the pandemic, with the number of visiting customers declining. As far as cost effectiveness is concerned, online banking is much more profitable than offline banking, which requires high maintenance costs.

But this efficiency-oriented business practices of banks, despite record-high profits, is generating inconveniences for customers in local communities, especially older people who are not familiar with internet banking services. With a growing number of bank branches disappearing, customers are forced to walk longer distances or take buses to use in-person banking services.

The digital banking trend has also taken a toll on bank employees. The top four commercial banks are now carrying out voluntary retirement schemes to cut some 3,000 positions by the end of this month.

Banks also face demands to play a greater public role. In the past decades, notably during the 1997-98 Asian financial crisis, a huge amount of taxpayer money was injected into struggling commercial banks, as their collapse was feared to have a devastating impact on society.

In Korea, banks are not entirely private companies, as their business practices are restricted by myriad government rules and their operations involve public aspects.

President Yoon Suk Yeol recently said that it is natural for the government to pay attention to banks because their services constitute a public good. Financial regulators also stressed the banks’ public role, announcing they would strengthen rules regarding the closure of branch offices this year. But it remains to be seen whether banks will be able to steer from their efficiency-centered strategy to take up a greater public role.