Posted October. 21, 2008 09:32,
The government announced yesterday that it will guarantee the foreign currency loans of domestic banks up to 100 billion dollars to raise capital liquidity and minimize the influence of the credit crunch on the real economy. Similar to 11 years ago, expenses resulting from the governments measure to provide both bullets (supply of won currency) and shields (loan guarantees) for banks will be paid for by taxpayers money.
Domestic banks have repeated their past mistakes in raising the volume of their business while earning easy money via large net interest margins. For example, the amount of bank loans surged a whopping 56 percent from 536 trillion won in late 2004 to 838 trillion won late last month. As they did in the late 1990s at the time of the Asian financial crisis, banks have a disastrous mismatch of short-term foreign currency loans and long-term won-denominated borrowings. This means banks will struggle to repay 80 billion dollars in short-term loans that mature by June next year, as global investors scramble to retrieve their dollars. If they were private companies, the banks could go under even though they generate profits.
Irrefutably, this financial crisis has originated in the global rather than Korean market. Still Korean banks, which has earned several billion won in profit per year with the help of taxpayers money, deserve blame for poor risk management. The government needs to deal with moral hazard of banks before rushing to guarantee dollar loans. Immediately after recovering from the financial crisis, banks doled out profits generated via taxpayers money to their own employees. For example, 12 state-run financial institutions raised salaries higher than commercial banks and paid exorbitant incentives to their employees. Woori Financial Group was caught trying to provide 1.63 million shares of stock options to its 49 executives in 2005, when it repaid less than half of public funds injected into it.
Before shelling out financial support, the U.S. and British governments urged banks to try to stand on their own feet while securing enough capital and follow rules on dividends and executive salaries. Korea should also remind its banks of the bitter reality that public funds are not provided for free. After getting out of the crisis, banks should make the utmost effort to rationalize their management and repay their debt to the people. Also, unions of financial companies should be pressured to support bank efforts to rationalize management instead of pursuing their own interests.