[Editorial] Are our methods of financial restructuring correct?

As the year winds down, the nation's financial markets appear to be heading for trouble. This is something we have more or less expected for some time, yet it is tantalizing to learn that even sound, profitable firms are encountering near-crisis situations every day due to cash crunches.

Banks are sticking to their tight monetary policies because they want to maintain the equity capital ratios prescribed by the Bank for International Settlements (BIS) before undergoing the impending structural reforms. The market is showing us the very reasons why we should expedite our financial restructuring plans.

Amid such a market response, the government has announced its plans for the second phase of financial restructuring. According to the reform blueprint, the government will inject 7 trillion won in public funds to rescue the six debt-ridden, non-viable banks. If they fail to strike deals for merger with profit-making sound banks, other near-insolvent banks are to be placed along with Hanvit Bank under the control of a financial holding company in February next year.

Our concern here is possible negative fallout from the mergers of non-viable banks with solid ones. To be sure, the plan for mergers as an alternative to the liquidation of bad banks runs contrary to the market mechanism. If the mergers result in threats of insolvency among the merged banks, this will greatly burden our economy to the point that we may have great difficulty recovering. Compulsory steps to reduce the capital of near-insolvent banks must be taken prior to their merger with the sound banks. This will reduce the risk to the good banks from their merger with their heavily indebted counterparts.

The government wants to avoid criticism that the bank mergers are government-engineered and manipulated. It has thus promised to do nothing more than monitor how well the banks proceed with the mergers. Whatever the methods used to join banks, attention should be paid to maximizing synergy effects.

Past bank mergers should serve to teach us a lesson. In the face of strenuous opposition from the people, the government went ahead with plans to merge Kookmin Bank, which catered to retailers, with Long-term Credit Bank, which focused on meeting the financial needs of wholesalers. The end result was that there was no synergy effect, but only the loss of wholesale financing.

The merger of the Hanil Bank and Commercial Bank of Korea, which required a huge injection of public funds, pushed the resulting bank even deeper into insolvency and thus necessitated the injection of even greater amounts of public rescue funds. This result was due to the failure to acknowledge the unique chemistry or characteristics needed for successful bank mergers.

The proper pairing of banks for potential mergers is needed to avoid public protests and controversies that might arise from the fact that the parties to the deal may have different and perhaps contradictory interests. Yet, if mergers are considered a positive development, the authorities in charge must adhere to clear principles in undertaking them.

Only the results of mergers will tell us whether the government's financial restructuring plans are the right ones. This means that the government and management of banks subject to merger must be prepared to assume a heavy responsibility. The way that the government and the banks can pay their debt to the nation for using up enormous amounts of public funds is by expediting the process of financial sector restructuring, efficiently completing the mergers, and equipping the banking sector with international competitiveness.