[VIEWPOINT] Bank Regulators Must Be Independent

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[VIEWPOINT] Bank Regulators Must Be Independent

The Korean economy is facing a dilemma. With the economic slowdown and corporate restructuring, the unemployment rate has skyrocketed. Petroleum prices are increasing and the won has depreciated against the dollar. The economy is in a period of stagflation, which is difficult to overcome because policy measures to combat inflation tend to increase unemployment and vice versa. The cause of the stagflation is that after the IMF financial crisis, the government implemented policies centered on avoiding another crisis by pouring funds into the economy instead of pursuing fundamental structural reforms.

Why can't the government advance reforms even though it invested 150 trillion won ($120 billion) of public funds in the financial sector?

For the last three years, the government has pursued financial reforms by conducting mergers and closings of failed financial institutions. But these introductions were only measures to buy time; they identified neither fundamental causes nor was responsible for financial failures.

The reform policies were aimed at minimizing the number of closings by the provision of huge sums of public funds. While a number of banks were nationalized by way of a decrease in capital, the Financial Supervisory Commission has strengthened its control over financial institutions, wielding all-around power over the market.

Ultimately, the responsibility for financial reform failures were borne by the people, and the reform itself has deteriorated to the creation of a new government-controlled financial system. Financial restructuring grew dull, and our economy became a quicksand swamp, swallowing up tremendous amounts of public funds.

After a series of bribery cases involving officials at the Financial Supervisory Service, there is again talk of reorganizing regulatory agencies. The government wants to separate the functions of financial institution supervision and inspection. It wants a government body, the Financial Supervisory Commission, to supervise the institutions, while a private organization, the Financial Supervisory Service, takes charge of inspections. But ultimately, only the skeleton of the inspection function would be left to the Financial Supervisory Service, and the Financial Supervisory Commis-sion would have formidable control over inspections of the financial sector. So the Financial Supervisory Commission would reign as governor-general of the financial sector and have a firm grip on every management decision.

When government organizations rule the banks, politics will inevitably creep in and corruption will develop. Specialization and neutrality are keys to the quality of financial supervision. The financial sector is becoming more specialized as communications technology improves. A financial supervisory body must be able to guide the development of the industry, and needs the capacity to collect and analyze information swiftly and apply it correctly to its supervisory duties.

Most of all, the supervisor's neutrality is crucial so that lending decisions by the private sector are not influenced by politics and government. The Financial Super-visory Service was set up as an independent organization for that reason in 1999.

If financial supervision is in the hands of the government, government interference may become a general practice. The system of financial supervision should be an autonomous private organization, neutral and independent, to merit domestic and international confidence. The government should pay heed to the advice from the Basel Committee on Banking Supervision, which said that for the efficient management of supervisory institutions, their responsibilities and objectives should be clarified and independent management guaranteed so they can be free from political pressure and government influence.

by Lee Phil-sang

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