[Yoon Manho's Financial Focus] The Role of Regional Banks in Balanced Regional Development

'Balanced Regional Development' Is an Urgent and Crucial Task
The Role of Regional Banks Is Vital for Revitalizing Local Economies
Treasury Account Selection Plans Require Redesign

Regional economic imbalance is a crucial issue that must be addressed in South Korea. While it is indeed a structural issue that arose during the country’s rapid economic development, it now far exceeds a simple urban-rural gap, exhibiting extreme concentration in the Seoul metropolitan area. The high concentration of population and economic power in Seoul and its vicinity has led to an outflow of the youth and working-age population from provincial cities, the collapse of local government tax bases, and a heightened risk of regional extinction. The recent emergence of the Jeonnam-Gwangju Integrated Special City is a policy response born out of such a sense of crisis. To tackle core challenges facing the Korean economy—including low birth rates and population decline, insufficient real estate supply and surging housing prices, educational issues centered around famous school districts, youth unemployment, and elderly poverty in an aging society—regional economic revival and balanced development must be the starting point in searching for solutions. Therefore, there must be a nationwide consensus that balanced regional development cannot be achieved without the government consistently nurturing local cities, creating industrial complexes, investing in settlement conditions, and allocating budgets to localities over the long term, regardless of changes in administration.

The Role of Regional Banks in Revitalizing Local Economies

I would like to emphasize the crucial role that regional banks play among various measures to revitalize local economies and achieve balanced regional development. Regional banks are vital financial channels because they can establish a virtuous cycle where the deposits generated in a region are reinvested locally and work in tandem with various policy finance programs to support local businesses and small merchants. Local small business owners whose financial structures are not strong and who lack high credit ratings often find it difficult to access national commercial banks without the help of regional banks. Moreover, regional banks themselves fall far behind commercial banks in terms of capital size, branch networks, and digital banking and artificial intelligence capacities. Consequently, policies to foster regional banks must accompany efforts to revitalize local economies.

The National Growth Fund, which launched last December, can only become a practical catalyst for private investment if there is close cooperation among local businesses, regional banks, and local governments. Whereas past regional development relied mainly on government budgets, the current government aims to shift the paradigm to one where private capital circulates locally through the National Growth Fund platform. In this way, regional banks should be able to collaborate with major policy financial institutions such as Korea Development Bank, Export-Import Bank of Korea, Korea Credit Guarantee Fund, and Korea Technology Finance Corporation to support core regional companies or those facing management difficulties with preferential rates, strengthen guarantee services for regional startups, and take the lead in boosting regional economies.

Strategies for Selecting Municipal Treasury Banks to Support Regional Bank Development

A 'municipal treasury bank' refers to a financial institution that manages a local government's finances. Local governments select financial institutions for General Accounting (Treasury I) and for special accounts or funds (Treasury II). It is appropriate for local governments to take the lead in developing and fostering regional banks, especially as both local governments and regional banks are struggling due to population declines and economic stagnation. By supporting each other and harnessing synergies, they can most effectively achieve balanced regional development. As part of this, I propose a new approach to selecting municipal treasury banks aimed at fostering regional banks.

When selecting local treasury banks, the evaluation criteria should be redesigned. Rather than focusing primarily on quantitative competition with commercial banks over deposit and loan rates or contributions, it is desirable to place greater emphasis on qualitative criteria such as regional reinvestment rates, lending performance to local small and medium businesses, and contributions to the virtuous cycle of regional economies. In fact, regional banks are already subject to the same prudential regulations as commercial banks despite operating under relatively difficult management environments compared to major commercial banks or NH Nonghyup Bank. They are responsible for regional-focused lending to ensure that local funds circulate within the region instead of being drained. Therefore, it is justifiable to grant preferential conditions when designating local treasury banks.

Accordingly, the selection of treasury banks in the Seoul metropolitan area should continue to be based on market competition among commercial banks. However, in local municipal and county governments, I suggest that regional banks be designated for Treasury I, and NH Nonghyup Bank, with its dense branch network in towns and townships, take on Treasury II. Rather than competing, local governments, regional banks, and NH Nonghyup Bank would collaborate for local economic revitalization, forming a true 'win-win-win' structure.

Overseas Cases of Regional Bank Development

Japan, like Korea, also selects financial institutions to handle local taxes and payment operations for local governments through the Designated Financial Institution System. According to the Japanese Regional Banks Association, regional banks account for about 62% of designated financial institutions in Japanese local governments, making them the mainstream. This reflects a top priority placed on close regional cooperation between local governments and local banks. In contrast, in Korea, only about 14% of designated Treasury I banks are regional banks, while NH Nonghyup Bank, with its nationwide regional cooperative network, holds a high 68% share. Korea may well look to Japan as a reference point.

Germany’s Sparkasse is often cited as a successful case of community banking. Unlike the Korean model, Sparkasse consists of small, publicly operated local savings banks directly run by regional governments. Their relationship-driven banking approach is credited with providing a stable source of funding for local small and medium-sized firms even during economic crises, functioning as a financial safety net during downturns.

Regional Banks: The Cornerstone of Local Development

Jaime Lerner, the former mayor who transformed Curitiba, Brazil into a smart city at low cost, emphasized that 'the starting point for regional development is not budgets, but a change in mindset,' and claimed that 'local governments, local businesses, and citizen participation are the keys to success.' The Japanese regional financial group Fukuoka Financial (FFG) has also established start-up centers and funds to support local ecosystems; for example, when Fukuoka City collaborated with private IT firms to remodel closed schools and foster a public-private venture startup ecosystem. In this way, regional banks, working closely with local governments, should take the lead in discovering specialized local competitiveness and reviving local economies.

The government is now seeking to create a breakthrough foundation for regional balanced growth through three major mega-projects for Honam, Chungcheong, and Yeongnam. In today’s environment of global survival of the fittest, it is a considerable strength for the government to be able to strategically devise and push forward such powerful industrial policies as in Korea. Regional banks should respond proactively in line with these projects, supporting industry clusters such as semiconductors and AI data centers tailored to their local characteristics. By working together with the central government, policy financial institutions, local governments, and local companies, regional banks can become the cornerstone for tackling the national agenda of balanced regional development.

Manho Yoon, Financial Columnist (Former President and CEO of KDB Financial Group)

This content was produced with the assistance of AI translation services.