Toward rebirth of the BOK

Nov. 14 is “independence day” for the Bank of Korea. On that day in 1997, the National Assembly finally approved a new central bank law ensuring the institution’s sovereignty on monetary policy and protecting it from outside political and government pressure. The Bank of Korea governor became the legal chair of the monetary policy committee for the first time in half a century.

Before, the chair had been reserved for the finance minister. The Bank of Korea complained of being an outlet of the finance ministry. It attempted revolt from time to time, but was humbled by the almighty finance ministry. It did not get its hopes up when a presidential financial reform committee proposed to revise the central bank law. Then the liquidity and currency crisis in late 1997 erupted, bringing in the International Monetary Fund with sweeping reform outlines for the country’s financial system and giving traction to redesigning the central bank’s role.

The financial reform committee’s reform design was modeled after the U.S. Federal Reserve. The Federal Reserve Board, the governing body of the Federal Reserve System in charge of U.S. monetary policy, is comprised of governors of 12 Federal Reserve Banks. The board is the head, and the banks in Federal Reserve Districts form the body that acts upon the Fed policy. In Korea, the monetary policy committee would serve as the policy-making board and the Bank of Korea would act upon its decisions.

The central bank vehemently opposed this, claiming nothing would change if members representing the interests of the finance ministry dominate the committee. After heated debate, the committee decided to come under the Bank of Korea. Of seven monetary policy committee seats, two are permanently reserved for the Bank of Korea governor and deputy governor. The BOK governor has the right to nominate one out of the remaining five. The committee is therefore sometimes sneered at as a cheering squad for the governor.

In return for gaining independence in monetary policy, the BOK had to relinquish supervisory authority over the banking sector. Banks are shrewd. They regarded the central bank as a paper tiger as it no longer has the right to meddle in their affairs.

The BOK became more and more isolated and self-conscious. It jumped every time government officials mentioned the interest rate. It growled in annoyance at the government interfering in its jurisdiction. The BOK refused to go along when the government agreed with the IMF to bring down the dangerously high interest rates in the spring of 1998 at the onset of bailout programs. The local central bank brought an impression on itself that it was more protective of its interests rather than those of the economy.

Whenever the BOK was accused of being overly timid, it talked of lacking supervisory right. Many believed the central bank had a point until then U.S. Fed Reserve Chairman Ben Bernanke carried out a series of unconventional moves to restore the economy as it faced the biggest crisis since the Great Recession during his service from 2006 to 2014 — including the large-scale purchase of government and mortgage-backed securities in bouts of quantitative easing to bring down the long-term interest rates. People discovered the central bank holds explosive unconventional weaponry, even when it runs out of the conventional bullet through moderation of short-term interest rates.

Of course, it can be dangerous if the central bank goes too liberal and creative with its hold over the money printer. Interest rates and money are not specific target missiles that can affect only specific areas. It can be an atomic bomb that can wreak havoc on industry and the nation. The entire economy could be in jeopardy. The central bank has that much power. It is why central banks went to work after the governments in the U.S. Japan, Europe, and China failed to revive the economy since the 2008 financial crisis.

Quantitative easing entered the Korean scene after former finance minister Kang Bong-kyun floated the idea as an economic platform for the ruling party for the April 13 general election. The BOK’s role came under spotlight again. Cleaning up the zombie enterprises surviving entirely on loans and household debt exceeding 1,200 trillion won ($1.045 billion) has become a life-and-death matter for the economy. If it is not tended to immediately, it could kill Korea Inc. and the economy.

The government has run out of options and the ruling party lost power to offer any help after losing the majority of seats to opposition camps in the recent election. The opposition is hardly likely to take up an economic agenda of the ruling party. But the idea of restoring to the central bank power to accelerate corporate restructuring and deleverage household debt has a feasible appeal. The central bank should not shoot down the idea just because it came from a former senior bureaucrat. Instead, the BOK could use the momentum to show what it can do.

The Bank of Korea law doesn’t need to be amended to carry out the idea. Even under the current law, the central bank can recapitalize the state-run entities Korea Housing Finance Corp. and Korea Development Bank to help them carry out deleveraging. It can fund corporate restructuring if it ventures to be a little inventive.

The existing members hold their last monetary policy meeting on Tuesday. Four of the seven members would be replaced afterwards. It would be the last chance for the existing board to leave either without any achievements or contribute to its service as a rescue squad for the economy.

JoongAng Ilbo, Apr. 15, Page B8

*The author is the business news editor of the JoongAng Ilbo.

by Jung Kyung-min