[Focus] Financial policy is in confusion

Even government officials point out that remarks by high-ranking officials are troublesome. And officials of domestic mutual savings firms contend that the government triggered the latest rush of withdrawals.

In fact, customers were disturbed after remarks by high-ranking government officials. Analysts indicate that the measures hurriedly taken to settle the incident was lacking. In this connection, government officials contend that it is desirable to lead mergers and acquisitions in a desirable direction because voluntary integration is almost unimaginable.

Lee Ki-Ho, senior presidential economic adviser, said Dec. 2 that there would be one or two more financial troubles among domestic mutual savings companies -- problems similar to those of Dongbang and Yeollin Mutual Savings & Finance.

Lee Keun-Young, head of the Financial Supervisory Commission (FSC), also told the National Assembly that the FSC is investigating 14 mutual savings firms, noting that one or two additional banks are likely to face trouble.

Their remarks triggered massive withdrawals of deposits at even healthy banks such as Dong-A Mutual Savings & Finance. As a result, Dong-A, the nation's second largest mutual savings firm, voluntarily applied for suspension of operation Dec. 8.

"We set aside 30 billion won of cash in preparation for partial deposit insurance system that will be implemented from next year,¡± the president of a domestic mutual savings firm said. ¡°But we can hardly stand up with the rush of cash withdrawals."

The mutual savings and finance companies are also dissatisfied with the plan of the The Financial Supervisory Service (FSS) to provide them with an emergency fund of 1 trillion won. They pointed out that the financial watchdog fanned the uneasiness on them as its assistant deputy chairman Kim Sang-Woo revealed that it may suspend the business of two other companies. They are also displeased with the FSS plan to have the Korea Deposit Insurance Corporation (KDIC) pays up to 5million won (to clients) during the period of business suspension.

The president of a company, identified only as ¡°B,¡±claimed, ¡°Deposits at the mutual savings and finance companies are all subject for being protected. So, just one announcement that the KDIC will pay without limit, the current rush of customers to withdraw their deposits would stop.¡±

The FSC's Lee has been saying that mergers among blue-chip banks are imminent since his inauguration as FSC head last August. In September, he said that the mergers would be announced in October. In October, he said that it would happen in November. Last month, he said it would happen in December. By Monday, the merger remains as rumor. An executive at a domestic bank pointed out that it is unthinkable that the FSC head is to set the timetable for a merger among banks. KorAm Bank's leading foreign shareholder Carlyle said that a bank merger should happen to enhance shareholder value, not to come up with a government policy. Also, it is unclear whether the government will be able to transform insolvent banks into healthy ones by pouring public funds into them before the year¡¯s end. Some blue-chip banks complain about the government's intention to combine them with some insolvent regional banks.

The financial policy is required to be market-friendly. The market is changing, and the circumstances surrounding the market are changing, too. The consistency of financial market policy lies on whether it is market-friendly. It would be troublesome if policy makers change their words.

It is true that Lee forced a merger between blue-chip banks. It is believed that banks need to merge to enlarge their operation, thus sharpening their competitiveness. The merger needs to be done voluntarily. However, it has so far been postponed on grounds that the bank employee union is opposing to it or it would result in massive layoffs.

Hong Chan-Sun hcs@donga.com