Tug-of-war between gov¡¯t and bank union

Both the government and the bank union are confronting each other on some core controversial issues including a financial holding company law and deposit protection policy. In the fifth round of talks, which was opened at Myongdong Cathedral in Seoul at July 11 afternoon, both the government and the Korea Financial Industry Union (KFIU) once made mutual concessions, arousing an optimistic prospect. Soon, however, they declared rupture of the negotiations again.

Although Financial Supervisory Commission (FSC) Chairman Lee Yong-Keun made a proposal for agreement, the Ministry of Finance and Economy (MOFE) reportedly dropped the suggestion, saying that the government had already made too much concession.

Financial holding company law:

In a briefing July 11, the FSC spokesman Kim Young-Jae firmly insisted that the financial holding company law is the basic principle of the government¡¯s second financial restructuring, defying any chances of compromise and concession. He explained that if the legislation of the holding company system is postponed or canceled, the banking restructuring cannot be carried out and the nation¡¯s sovereign rating will be sharply plunged.

The government, instead, made clear of its stance that it would hold itself from forceful mergering among banks or massive layoffs as possible as it can, and the bank union agrees with the principle. However, the government is firmly standing on its ground against the union¡¯s demand for a memorandum promising that the financial holding company system shall not be implemented if it unilaterally pushes bank employees to accept it. As the bank union took a step backward from its initial request of postponement of the holding company system, there remains a possibility that both parties will reach an agreement.

Tackling bad loan problem:

The government promised to repay US$1 billion, which local commercial banks provided to the former Soviet Union under the former President Roh Tae-Woo government, and 4.9 trillion won for merchant banks that were liquidated hit by the foreign currency crisis.

However, the government is in need of more time to pay for the Economic Cooperation Loans, since Russia should declare default and take legal proceedings. Also, with 64 trillion won of public funds gone, the government¡¯s payment for liquidated merchant banks will not be easy.

The bank union is calling for the government to reimburse banks for their Russian loans, requesting concrete repayment schedule and methods to raise funds.

Also, the unionists blame that the government are not to reimburse 4 trillion won that merchant banks voluntarily purchased before their liquidation, even if the money is also a target of the government¡¯s deposit protection.

Special law against government¡¯s intervention in the financial sector:

This issue seems to be a tactic of the union, which is going to take an inside track by forcing the government to acknowledge that past government coercive policies in the financial sector had contributed to the bank sector¡¯s present weak footing.

The government and the KFIU agreed to the point that the government should follow a transparent rule, even if the government inevitably asks for a help of commercial banks for such reasons as market stabilization. Accordingly, the government suggested to employ the principle to its financial supervisory provisions.

Deposit protection policy:

The bank unionists are strongly resisting against the government¡¯s plan to reduce the deposit guaranty limit to 20 million won starting next year in a move to eliminate morale hazards of the financial sector. They argue that the measure translates into liquidation of small-sized regional banks, so the limit should be expanded or the enforcement schedule should be postponed.

However, the government claims that the delay of the plan could give rise to morale hazards of other financial institutions, as well as depositors and banks. In particular, the MOFE does not yield an inch on that matter, because it reportedly believes that its public fund burdens snowballed since it guaranteed 100% of deposits during the foreign exchange crisis.