[Editorial] The Culprits of the Credit Crunch

President Lee Myung-bak has repeatedly encouraged financial authorities to urge banks to keep lending to small businesses, but bank management has barely budged. In a meeting at the presidential office Thursday, ruling Grand National Party Chairman Park Hee-tae said, “The government has tried to inject more money to help lenders, but cash-strapped domestic banks are reluctant to lend.” In other words, despite the repeated pledges of the president and the ruling party chairman, the credit crunch has worsened, exposing the government’s incompetence to correct the situation.

Banks are refusing to lend in the face of upcoming financial restructuring that will force them to improve their capital adequacy ratios under the Bank for International Settlements. They fear that if they follow the request but face non-performing loans arising from insolvent companies, their soundness will suffer and the banks could ultimately be merged or absorbed by other banks.

The average capital adequacy ratio of domestic banks exceeded 11 percent, a level above the international standard. The expected onset of the economic slowdown next year, however, is expected to bring an increase in bad loans from households and enterprises. Without a fundamental solution to this situation, the vicious cycle will continue no matter how the president pressures banks and the central bank cuts interest rates.

A desirable resolution is a series of measures such as the issuance of subordinated bonds to help banks alleviate their liquidity shortage, while removing doubts and fears over the upcoming financial restructuring by clearly announcing the government’s plans. These are the main functions of the Financial Supervisory Commission and the Financial Supervisory Service. Financial Services Commission Chairman Jun Kwang-woo, however, has failed to show adequate leadership and his slip of the tongue on the market’s situation cost him the confidence of the financial sector.

He threatened banks when he said in New York 10 days ago, “To recover from the financial crisis, the government is preparing a sickle and hammer approach used in past restructuring.” Faced with a backlash from banks, he retreated by saying, “Now isn’t the proper time for arbitrary restructuring of the banking sector.” After word spread that he was harshly criticized by the president, no government organization has dared to speed up restructuring.

With financial markets at home and abroad undergoing rapid change, Korean financial authorities are out of function and have no capacity to deal with the situation. For the financial sector to run properly, the two financial watchdogs must find a way to harmonize their separate structures.