The Democratic Party of Korea forced legislation prohibiting banks from reflecting costs in their loan additional charges and punishing employees in violation. The banking sector has since retracted its opposition and submitted a compromise plan. Observers in the financial industry have noted that the banking sector ultimately succumbed to the demands of Lee Jae-myung, the Democratic Party chairman, a significant presidential candidate in the opposition, amid the populist legislation from the major opposition party.
According to the banking sector on the 27th, the banks conveyed their opinion through the Korea Banks Association to Representative Min Byeong-deok of the Democratic Party, who proposed amendments to the Banking Act, requesting that the punitive measures be changed to a format where the financial authorities impose sanctions instead.
The amendment proposed by Representative Min last December primarily aims to prohibit banks from reflecting the deposit insurance corporation premiums and the contributions from the Korea Inclusive Finance Agency in loan interest rates. Additionally, it specifies that contributions from the Technology Guarantee Fund, Credit Guarantee Fund, Housing Finance Credit Guarantee Fund, and local credit guarantee foundations must not exceed 50% of the loan interest rates. Violating this would subject bank employees to a penalty of up to one year in prison or a fine of up to 30 million won.
Bank loan interest rates are generally determined by combining the base rate and additional charges. The additional charge is a surcharge that reflects the bank's operating expenses, credit risks, and the cost of capital. It varies depending on the borrower’s credit rating, type of collateral, and income stability. Since various contributions or premiums are costs incurred by banks when handling loans, they should be reflected in interest rates; however, the Democratic Party has stated their intent to legally prohibit this.
The amendment to the Banking Act was included in the 20 tasks related to people's livelihoods announced by the Democratic Party's joint committee on the 12th. The Democratic Party's committee on livelihoods is an intra-party organization co-chaired by Representative Lee. In January, Representative Lee held a meeting with the heads of six major domestic banks (KB Kookmin, Shinhan, Hana, Woori, NH Nonghyup, IBK Industrial Bank).
In response to pressure from Representative Lee and the Democratic Party, the banking sector has come to a consensus, requesting only the removal of the punitive clause, which was conveyed to Representative Min. It has been reported that Representative Min indicated a willingness to accept the banks' requests.
Concerns have been raised in the financial sector that the amendment is a law that prohibits the reflection of legitimate expenses in loan interest rates, which is anti-market. Kim Byeong-hwan, the chairman of the Financial Services Commission, also noted during a press briefing in January that both the government and the political sector should be cautious about intervening strongly in bank additional charges. The financial authorities are reportedly against the amendment, stating that additional charges should be determined autonomously based on market conditions.
Concerns about side effects have also emerged. There is a prediction that if banks cannot reflect legitimate expenses in loan interest rates, they will maintain loan rates by reducing preferential interest rates. The senior expert at the National Assembly's Public Administration and Security Committee also expressed in a review of this amendment that "the lack of specification of preferential interest rates as a component of loan rates raises concerns about potential increases in loan rates."
A financial sector official stated, "There were many concerns about legislation that prohibits private financial institutions from having a legitimate pricing system and issues surrounding 'breach of trust.' There are many worries that this could lead to the introduction of basic loans or windfall taxes, as the Democratic Party suggests."