This year, the Bank of Korea cut the benchmark interest rate twice in its bid to help energize the flagging economy. But this low interest rate policy is hurting financial companies by squeezing their profits.

On Thursday, the BOK decided to leave the key interest rate at 2.75 percent for December. Yet it is expected to cut the already low rate further next year as the economy is likely to remain stagnant.

When the central bank lowers the benchmark rate, banks also cut their lending rates. But they cannot cut the rates on some deposits by the same degree because they are already close to zero. As a result, their income dwindles.

According to a recent report of the Korea Institute of Finance, domestic banks’ average net interest margin ― a measure of the difference between interest income and interest expenses ― fell to 2.06 percent in the third quarter of the year from 2.35 percent in the first quarter of 2011.

Consequently, banks suffered a sharp drop in their profits this year. In the January-September period, their net profits totaled 7.5 trillion won, a 39 percent drop from 12.3 trillion won during the same period a year ago.

Low interest rates have also pushed insurance companies into trouble. Domestic insurers sold policies in the past that guaranteed high benefits to customers. But these days, their return on assets is lower than the return level they had promised.

Once this negative interest rate spread occurs, it is difficult for insurers to find solutions. The danger facing domestic insurance firms was aptly described by Kim Seok-dong, chairman of the Financial Supervisory Commission. He recently likened them to “runaway trains heading toward a cliff.”

For brokerages, low interest rates are a boon in normal times as they make stock investment more attractive. But these days, investors are fleeing the bourse as uncertainty hangs over both Korean and global economies.

According to the Korea Exchange, the 17 listed securities companies earned 340 billion won in net profits during the April-September period, a 41 percent drop from the same period last year.

The situation is even worse for asset management firms, which are suffering a continued outflow of money from the investment funds they manage. According to reports, four out of every 10 asset management companies incurred losses this year.

As low interest rates pose big risks for domestic financial companies, the Financial Supervisory Service have recently organized a task force to gauge their future impact on each segment of the financial industry.

The task force has conducted a stress test under the assumptions that the economy would grow 1 percent annually, with the key interest rate lowered to 1.75 percent and real estate prices falling by 1 percent annually.

Under this scenario, banks’ combined net profits were forecast to plunge to 1.4 trillion won in 2017 from this year’s estimate of 8.5 trillion won. Should the trend continue, their profits were seen swinging to a net loss of 5.2 trillion won in 2022.

The FSS did not disclose the outcomes of the stress test for insurers and brokerages, simply saying that their cases were not much different from that of banks.

Caught in a low interest rate trap, financial companies are struggling to come out of it by downsizing their operations and workforces. They have already implemented early retirement programs for their employees and are set to close down unprofitable branches.

But these belt-tightening measures alone are not enough to restore their profitability. They need to diversify their income sources by developing new products and exploring overseas markets.

The financial regulator also needs to soften regulations to allow them to diversify their investment portfolios, which are overly centered on low-return government bonds. But at the same time, the regulator should ensure that financial companies do not take too much risk to shore up their profitability.

The FSS recently advised insurance companies to increase their capital base to prepare for the growing interest rate risks. It was a proper step that would help prevent potential problems.

Low interest rates are expected to stay for some time, taking their toll on the national economy as well as financial companies. The only way to get out of the trap is to boost the economy’s growth potential by enhancing productivity and carrying out structural reforms. Whoever is elected the next president should bear this in mind.