Attempts to Regulate Interest Rate Spreads Are a Typical Example of Backward Government-Directed Finance

Last year, on December 30, 2024, an amendment to the Banking Act centered on controlling spreads was proposed under the leadership of Democratic Party lawmaker Min Byeongdeok. On March 6, it was announced that this amendment to the Banking Act, along with the Special Act on Semiconductors, the Inheritance and Gift Tax Act, and the Franchise Business Act, would be designated as a fast-track bill and pushed through. In the end, however, it was put on hold and remains temporarily suspended.

The core of the Banking Act amendment is to prohibit insurance premiums, statutory contributions, and similar costs from being reflected in lending rates, on the grounds that doing so violates the beneficiary-pays principle by burdening financial consumers. In other words, it is an attempt to regulate spreads, which banks determine through competition in the financial market.

Controlling spreads, perhaps the only component of lending rates that commercial banks can actually determine in the loan market, reflects the government’s refusal to recognize the financial market. The history of government-directed finance in Korea is nothing new.

Under government pressure, during the COVID-19 pandemic in 2020, a total of 20 entities—including associations across the entire financial sector, the Credit Finance Association, and credit information companies—came together to sign the “COVID-19 Credit Recovery Support Agreement.” Under this agreement, if debts of 20 million won or less were repaid within a certain period, no delinquency record would remain. At first glance, this may have helped reduce the occurrence of multiple debtors, but in practice it only produced adverse effects: unconditional relief encouraged moral hazard, undermined the credit evaluation system, and damaged financial autonomy.

Government interference in and control over bank interest rates is in fact an old and chronic problem. Claiming to reduce household debt and stabilize housing prices, the government pressures banks to raise lending rates; then, claiming to ease financial consumers’ burdens and help people buy homes, it rolls out various housing mortgage loan policies and pressures banks to lower lending rates. In truth, household debt and housing prices rose because the government flooded the market with loans in the name of helping people purchase homes. In the end, this is simply the result of government intervention.

This should be left to the market. If entrusted to the autonomous decisions of market participants, interest rates will adjust naturally. Lending rates are determined by adding each bank’s self-set spread to the COFIX or bank bond rate. Lending rates should be allowed to move according to market rates and spreads. Interest rates are also prices, and the more the government tries to control and interfere with prices, the more distorted the financial market becomes, with the damage borne entirely by ordinary financial consumers. Even the current situation—where banks’ profits temporarily rise under a high-interest-rate stance maintained in the name of reducing household debt, while ordinary people struggle under the burden of loan interest—is ultimately the government’s fault.

Controlling spreads is ultimately price control in the financial market and will only worsen the harms of government-directed finance. At a time when Korea should be advancing into high-tech industries that combine its strength as an ICT powerhouse with Fourth Industrial Revolution technologies such as AI, the country’s financial industry remains trapped in backwardness under the shadow of government-directed finance.

The Banking Act amendment must either be blocked from reaching the plenary session or voted down. At the very least, the authority to determine spreads should be left to banks’ own autonomous management. Backward government-directed finance must not be allowed to keep holding Korea back on its path toward becoming an advanced economy.

Gwang yong Go

Policy Director, Center for Free Enterprise (CFE)

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Original title: 가산금리 규제 시도는 후진적 관치금융의 전형

Author: Gwang yong Go

Date: 2025-03-20

Source: https://www.cfe.org/bbs/bbsDetail.php?cid=column&pn=1&idx=27417