[Beyond the Scene] Another Temptation to Intervene in Interest Rates... Banks Have Changed, Politicians Have Not

Repeated pressure to cut loan rates
Interest rates are market prices; borrowers pay the price for artificial intervention

"Loan interest rates are prices determined by the market. They are not something financial regulators can intervene in by scrutinizing individual banks' rates one by one and telling them what to do."

That was what the director of the Bank Supervisory Bureau told me nine years ago, when I first covered the Financial Supervisory Service. He had me sit down when I stopped by to introduce myself as a reporter and explained how banks set interest rates. He walked me through everything, from how funding costs are adjusted to reflect credit risk, operating expenses and target profit margins, to the limits on regulatory intervention. The conclusion of his lecture, which lasted nearly an hour, was simple: If a bank arbitrarily inflated its costs or default risk, regulators should correct it, but they could not force banks to lower rates that had been calculated properly.

At the time, the Financial Supervisory Service had just moved to block Shinhan Bank's increase in its spread in late 2017, amid pressure from politicians to lower loan rates. As a reporter with no knowledge of finance, I felt bad about taking up the time of a busy senior regulator with such a basic question about interest-rate systems. At the same time, I wondered if the director in charge was frustrated by the government's and politicians' relentless demands for lower rates.

That memory came back to me because of the Financial Supervisory Service's parliamentary audit late last month. Min Byeong-deok of the Democratic Party of Korea criticized banks, saying they had offset the effect of lowering their spreads by reducing preferential rates. He argued that banks had resorted to a "trick" when loan rates rose even after some statutory expenses were excluded from spread calculations under an amendment to the Banking Act that took effect in July.

But interest rates, too, are market prices, and it is not so simple that they automatically fall just because a law is changed. Geopolitical instability stemming from the Middle East has pushed the yield on 10-year U.S. Treasury bonds from 4.1% at the start of the year to nearly 5% as of the publication date, putting greater upward pressure on banks' funding costs as well as credit risk. Combined with the financial authorities' efforts to curb household lending, banks are raising rates to manage demand for loans. Banks may have invited criticism from the National Assembly by reducing preferential rates rather than fine-tuning their spreads, but there are no shortage of factors driving rates higher. It would be a problem if members of the National Assembly's Political Affairs Committee did not understand this structure, and an even bigger problem if they did but pretended not to. It is fortunate that the discussion concluded with a decision to improve transparency in interest-rate calculations, but lawmakers should also examine global macroeconomic trends and the domestic regulatory environment before criticizing banks.

The reason the same stale scene keeps repeating itself nearly a decade later in debates over bank interest rates is that some politicians still hold outdated views of the banking industry. It is hard to deny the public role of banking, given that it is a licensed industry and that public funds were injected during the foreign exchange crisis. But that does not mean banks should be seen as mere profiteers making easy money from lending, or treated as public utilities whose rates can be controlled whenever needed.

In the meantime, domestic banks have changed beyond recognition. Financial holding companies centered on banks have expanded into nonbanking and overseas businesses, and are preparing for changes that are dissolving the boundaries of finance, including stablecoins and tokenized deposits. As a series of cyberattacks on financial institutions has shown, expectations for risk management and internal controls have also risen. Banks have not just grown in size; their business structures and the risks they must manage have become far more complex.

Artificially suppressing loan rates brings side effects. If banks tighten their lending reviews out of concern about declining profitability, some borrowers may be pushed to savings banks and then to private lenders. Given how much banks and the environment around them have changed over the past decade, is it too much to hope that politicians' views will change as well?

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