The announcement of the results of the June 3 presidential election is imminent. The newly inaugurated government will start its five-year term immediately from the 4th without a presidential transition committee. The burden on financial authorities is heavy under the new government system. Market uncertainty has increased since the state of emergency, and domestic and external economic conditions are deteriorating. The Korean financial sector is working hard to defend its soundness, regardless of whether it is first or second-tier finance. Major tasks from the previous government, such as curbing household loan growth and normalizing real estate project financing (PF), are expected to land on the new government's desk without being resolved. The new government has taken on the responsibility of overcoming crises scattered throughout the financial sector and having to pave the way for innovation.
ChosunBiz asked three former, current, and future presidents of the Korean Finance Association about the financial crises the new government faces and possible solutions. The Finance Association is the country's representative financial academic organization, with over 1,000 scholars. Former Prime Minister Jeong Un-chan and former Policy Chief Jang Ha-sung of the Presidential Office are among those who have served as presidents of the finance association. The interviewees, Kim Hong-beom, honorary professor at Gyeongsang National University, Kwak No-sun from Sogang University, and Shin Kwan-ho from Korea University, all concurred that 'the government should pursue practical policies rather than being bound by formality,' while each suggested different solutions regarding the details.
Professor Kim served as the 24th president from July 2014 to June 2015. Professor Kwak has been serving as president since July of last year. Professor Shin was elected as the next president after a vote among members last May and will begin his term on the 1st of next month. This interview was conducted in writing. The three association presidents sent their responses under the premise that they 'do not have a specific candidate in mind for election.'
―What is the biggest financial risk facing the new government?
Kim Hong-beom said, 'There will not be a massive risk in the financial sector this year. However, the new government must be cautious about a potential overheating and collapse of the real estate market due to large-scale economic stimulus policies. In recent years, household loan growth has quickly increased, and there have also been problems with the deterioration of real estate PF. The expansion and collapse of the real estate market could trigger a financial crisis through the weak links in our economy.'
Kwak No-sun said, 'The mere advent of a new government can be a cause of increased uncertainty in the financial market. Regardless of the anticipated effects of new financial policies, we can expect increases in uncertainty regarding policy direction, adjustment costs due to changes in the financial supervisory system, and a weakening of investment sentiment due to regulatory changes. Regardless of how policies, regulations, and government organizations change, they must be pursued in a way that maintains consistency and increases predictability.'
Shin Kwan-ho said, 'The financial risks faced by the new government are complex. Factors such as external shocks, sluggish domestic demand, and aging may lead to prolonged low growth in our economy. This has increased the risk of insolvency for corporations and households and places a burden on the soundness of financial companies. Another significant risk is the insolvency of the non-banking sector. Savings banks and the capital industry heavily rely on real estate PF. If short-term funding shrinks, it could lead to a chain of insolvencies. Increased arrears and defaults are already being observed in some business sites. There is also the possibility that risks could be transmitted throughout the entire financial system.'
―The growth rate of household loans has been fierce this year.
Kim Hong-beom said, 'This is not a situation to be relieved about. There is a possibility that the new government will pursue large-scale economic stimulus policies, and the scale of these stimulus policies depends on the future growth rate of household loans. From July, the three-phase stress total debt repayment ratio (DSR) regulation will be implemented, but regional housing collateral loans and policy loans are not subject to regulation. The effectiveness of regulation may not be significant. In addition, the effects of the phase three DSR regulation are expected to appear next year, considering a six-month to one-year lag.'
Kwak No-sun said, 'Rather than fixating on total quantity regulation, we need to strengthen qualitative management. The current risk level of household loan deterioration is low. However, there is concern about the deterioration of certain mortgage loans and small business loans, so continuous management focused on DSR is the most appropriate method. Additionally, there is a need to diversify housing finance centered around mortgage loans. We should develop and activate various forms of products, including housing finance combined with real estate investment trusts (REITs) and equity-based housing loans, to enhance the sustainability of the financial industry.'
Shin Kwan-ho said, 'Although the growth rate of household loans is within the authorities' target range, it is too early to be relieved. Real estate prices are rising, and there is discord between the financial authorities and the Bank of Korea. While macro-prudential policies should be implemented as planned, there needs to be harmony between those policies and the Bank of Korea's monetary policy so that it can focus on responding to economic conditions. The financial industry, which is centered on mortgage loans, places a burden on the entire financial system. Financial companies should increase their credit supply to future growth drivers such as small and medium enterprises based on their risk management capabilities.'
―The insolvency of real estate PF in the second financial sector is pointed out as a trigger for our economy.
Kim Hong-beom said, 'The urgent fire caused by the insolvency of real estate PF has been extinguished. However, it does not seem easy to organize the insolvent business sites in the mutual finance and savings bank sectors. While the financial authorities expect that the real estate PF in the financial sector can have a soft landing depending on future real estate market conditions, if market recovery is delayed, new insolvent business sites may emerge. At this point, the robust organizing and restructuring encouragement that the financial authorities are currently conducting is a necessary regulation. If they can achieve the planned results by June of this year, it would be better to approach it in a way that allows financial firms to manage their own insolvencies without further regulation. Additionally, it should be pointed out that the financial authorities need to conduct a thorough self-assessment of whether they had opportunities for proactive management during the rapid expansion of the real estate PF market from 2020 to 2022.'
Kwak No-sun said, 'There is a saying that 'a risk that has already been revealed is no longer a risk.' Unless the real estate market drops sharply, the likelihood of current real estate PF insolvency causing anxiety throughout the financial market is low. However, objective and transparent organization of insolvent business sites must proceed. In the past, real estate PF businesses have caused some instability in the financial market due to fluctuations in the real estate market. We need to structurally seek regulatory changes in real estate PF. It is necessary to strengthen capital adequacy regulations, such as increasing the self-capital ratio of implementing companies. We should incentivize the generalization of real estate PF businesses that combine equity products rather than being loan-centric.'
Shin Kwan-ho said, 'The desirable solution is to complement short-term liquidity while simultaneously pursuing structural reforms. After conducting viability assessments, insolvent business sites should be organized, and funding support should be directed to businesses with potential for recovery. If necessary, short-term liquidity supply can also be considered. Applying macro-prudential regulations to the non-banking sector to reduce regulatory arbitrage is also a good measure. The current macro-prudential regulations are concentrated on banks.'
―The need for reform of the financial supervisory system was raised even before the presidential election. What are your views on this?
Kim Hong-beom said, 'We must not fall into 'model selection traps.' The core of reforming the supervisory system is to address the current system's low efficiency, not to choose a specific model. An important element lacking in our economy's supervisory system is macro-prudential policy. Since the global financial crisis, the need for a macro supervisory approach to discuss the soundness of the entire financial system has emerged in academia. A president-led public-private joint task force (TF) should be formed, bringing together financial authorities, the Bank of Korea, and experts. This TF should closely examine the impacts of proposed economic stimulus plans on both the real economy and financial markets, and prepare necessary measures.'
Kwak No-sun said, 'It is not the formal organizational restructuring that is important, but the substantive and functional aspects that matter more. Before reforming the financial supervisory system, we need to diagnose the problems of the current system and study how to maintain the policy and supervisory cooperation model. If the financial supervisory functions of the Financial Services Commission are transferred completely to the Financial Supervisory Service (FSS) and the policy functions are moved to the Ministry of Economy and Finance, it may enhance the independence of financial supervision. However, from the perspective of market stability, cooperation between organizations may slow down, making rapid responses in financial crisis situations difficult. It is also necessary to consider the potential loss of financial policy expertise accumulated in the commission. Discussions should examine the independence, efficiency, and market stability of financial supervision altogether.'
Shin Kwan-ho said, 'We must move beyond mere changes in the structure of organizations towards enhancing the effectiveness of financial supervision. Right now, there are often discordances between the macro-prudential policies of the Financial Services Commission and the monetary policies of the Bank of Korea. This is due to differences in the policy promotion structures of each agency. Moreover, informal consultative bodies, such as the macroeconomic and financial issues forum (F4 meeting), lack transparency and accountability. If the new government reforms the financial supervisory system, it should include the Bank of Korea as one of the macro-prudential supervisory entities, clearly defining its responsibilities and policy promotion measures. The Bank of Korea has strengths in macroeconomic and systemic risk analysis.'