Regulator considers implementing tough rules on divided policy of financial institutions

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In the midst of inflationary recession due to the global financial turmoil, public feel a sharp pinch on rising expenses and costs while their income is stagnant as low. Meanwhile, financial industries, such as banking industry seems to have a great run for this year and expect to pay higher-than-expected amount of dividends. Among anti-Wall Street sentiment spreads all over the world, irritated public raises their concern over outstanding revenue increase and unreasonably high fee policy and dividends practices. Alerted by public concern and so call ‘corporate greed’ asserted by anti-Wall Street protesters, Korean financial authorities consider taking a certain measure that limiting dividends payment and fix their fee policy.

Based on statistics, the country’s banks expected to generate around KRW 10 trillion in the first six months of this year. Since the figure reached its peak in 2007(approx. 13 trillion), annual net profit could be reached its new record high up to 20 trillion according to news media.

Actually it does not seem to be easy for financial authorities to interfere private firms with their own salary and dividend payment. However, they might be able to press the companies to save enough money in order to prepare possible harder times under this global financial crisis. Recently FSC Chief, Mr. Kim also commented that financial institutions need to set aside money to improve their ability to deal with worsening global uncertainty (rather than paying hefty amount of dividends). Over the past 5 years, major top 4 banks paid 3.8 trillion won as dividend payments (17.5% of their net profit over the period). Also major financial brokers used to pay 1.8 trillion won over the period (32.4% of net profits for the previous 5 years).

Among major banks, foreigners own their shares of Korean major banks up to 60% except Woori as of the end of last year; which means roughly more than half of dividend payment belongs to foreign shareholders. Particularly, KEB acquired by global private equity fund, Lone Star, exercised its dividend payment in almost every quarter as well as every year-end. Due to the frequency and higher payout ratio, the major shareholder of KEB had received significantly higher dividend payment than other major banks (allegedly U.S based private equity fund generated at least 1.8 trillion since from dividend payment only).

Fee revenues from various kinds of fee charge might be able to contribute their probably higher-than-ever dividend paycheck of banks. They offered a shopping list of fee charge related to transaction via banks. According to data from KFCF(Korea Finance Consumer Federation), KFCF complained that there are too many kinds of fee charge related to transaction via banking.

More than 130 of fees are subject to charge in each banking transaction in average. Besides, the amount of fee payment in same transaction can be different depending on each bank. For example, when you use a teller in person for money transfer, SC will charge you a 3,000 won per transaction while Shinhan does for 600 won only. According to public release of FSS, an executive unit of FSC, Korean banks generated 3.7 trillion of profit from fee charge only, which roughly assume it could reach up to 5 trillion at the end of this year. If it is attainable, this figure will exceed last year’s: 4.4 trillion.
In order to drive banks to limit their dividend payout, financial authorities consider tougher rules on regulations if necessary. First of all, they required banks to reserve more enough amount of allowance for bad debts. Since an account of allowance for bad debts are considered as a large proportion of SG&A expenses, reserving more money for this account will decrease their net profit substantially. Also more bad debt reserve’s requirement is considered. Since K-IFRS(Korea-International Financial Reporting Standards) introduced, the accounting practice of bad debt allowance has been modified. While the amount of bad debts shall be forecasted for possible loss in the future under K-GAAP(Korea-Generally Accepted Accounting Principles), banks shall account for the amount of losses which occurred in actual basis. Alternatively, financial officials demand for banks to set aside more reserve for bad debt in bad debt reserve account from now on. Also to lessen the heavy burden of fee payment, financial officials strongly recommend banks to cut their bank fees under the circumstances.

It is not necessarily reasonable to oppose the fact that private companies execute what they want with their own money. However, initiated by government, most of Korean banks are funded and rescued by tax payers’ contribution and are in operation based on their savings. In that sense, if there are reasonable doubts in banking practice for public to be uncomfortable such as significantly high dividend payment and fee charges, it is nothing but sensible that certain adjustment needs to be considered.

Jinmok Kim(jinmok.kim@gmail.com)

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