Making real reformsThe current economic team appears to have the will to push ahead with radical and quick reforms in the financial sector with the belief that now is the best and last time it has for such restructuring during its tenure. But the drive may not produce the desired outcome unless its target and direction is clear.
In a sweeping restructuring following the 1997 Asian financial crisis, the government used astronomical amounts of public funds -100 trillion won ($88 billion) - to close weak financial institutions and used bailout funds to make banks lean and debt-free. It also established a supervisory system.
Since then, every time a new government was launched, it promised to implement further reforms and turn the country into a supposed financial hub for Asia. But the financial industry has not evolved in a way to become competitive on the global market. This is because governments, at heart, regarded the financial sector as an aid to industry, a way of supporting the economy and corporate activities rather than as a growth-contributing independent industry on its own, capable of generating good profits and jobs through innovative management.
True reform would be completely freeing private financial institutions from the multi-layered administrative regulatory web. Before demanding reforms from financial institutions, the regulators themselves must first be retooled to bring about changes in the industry.
Some would argue that since the global financial meltdown of 2008, governments of advanced economies have tightened regulations on their financial sectors. The United States, Britain and European Union governments have strengthened financial institutions’ debt-to-asset requirements and toughened regulations to prevent moral hazards and overly risky business ventures. But those measures by no means interfered with the institutions’ sovereign management.
Large financial institutions have all turned themselves into holding companies since the crisis in the late 1990s, but synergies from owning affiliates in a range of financial businesses have been limited due to regulations on transactions within the groups themselves. A high bar to entry into the securities business and various regulations on asset management have dampened innovative and dynamic activity in the capital market. To draw out individual creativity and capabilities of financial institutions, the government must rationalize its supervisory system to maximize effectiveness in ensuring integrity in financial institutions.
The collective irregularities that ended up in serial insolvencies - as in the case with merchant banks, credit card companies and mutual savings banks - must not be repeated. Banks are required to meet capital regulations under the Basel III Accords, the same as their counterparts in advanced economies. The supervisory system needs a makeover from supervision to punitive actions to uncover wrongdoings and non-transparent business activities.
Financial institutions also should be given more liberty in setting interest rates, commissions, and dividends, which should be adjusted according to the market. Outside interference in appointments and management should be prohibited so that managing executives will be more motivated and confident. People with creative minds from outside the industry should be recruited. Corporate restructuring is needed to clean up bad debts and get rid of the over 3,000 so-called zombie companies subsisting entirely on debt. State-run banks like the Korea Development Bank and Export-Import Bank of Korea should speed up restructuring at large companies.
The rise of financial technology, or fintech, will help accelerate competition for efficiency in the financial sector. The less the government interferes, the faster the fintech industry will grow. The government wants to transform the financial sector to make it more oriented toward the capital markets. The main Kospi, the technology-laden Kosdaq, and startup-driven Konex markets must support fund-raising by small and mid-sized companies and startups. The licensing for securities companies and regulations on foreign exchange-related operations must be eased to better attract foreign capital. Red tape on management and operations of private equity funds should be lifted.
To make such a financial reform drive succeed, the Financial Supervisory Service (FSS) should support the idea of the Financial Services Commission head governing the FSS as well. Meanwhile, the Bank of Korea must strengthen its role in ensuring stability in the financial market by making timely evaluations and forecasts of risk factors and cooperate with the FSC to pre-empt any dangers to the economy.
Translation by the Korea JoongAng Daily staff.
JoongAng Ilbo, Oct. 28, Page 35
*The author is a former minister of finance and economy.