![]() Financial Services Commission Vice Chairman Rhee Chang-yong speaks about ways of stabilizing financial markets in a meeting with research center heads from local brokerages at the Banker’s Club in Myeongdong, Seoul, last October. / Korea Times |

Vice Chairman of Financial Services Commission
Feb. 25 marks the end of the first year under the administration of President Lee Myung-bak. If I were to pick the government ministry that had been the busiest year so far, I would be tempted to say that it was the Financial Services Commission (FSC). Indeed, looking back, it almost seems as if we spent several years, not one, dealing with a wide array of urgent, yet complex, policy challenges in the midst of a global financial crisis.

There is a good reason for this. For the past five decades, Korea's manufacturing industries have made enormous strides and have enabled Korea to emerge as the world's thirteenth largest economy. Nowadays, Korea's manufacturing powerhouses like Samsung Electronics, Hyundai Motors, and POSCO are global brand names that consumers and businesses worldwide easily recognize and trust.
Korea's financial industry, on the other hand, has lumbered through a less stellar path. That is, the industry was historically relegated to the sidelines only to prop up the country's booming manufacturing industries and too often teetered under the weight of heavy-handed government regulation. As a result, Korea fell short of creating a truly dynamic market environment where well-capitalized and globally competitive financial service firms, backed by abundant domestic savings, could emerge and thrive.
The administration of President Lee took office with a bold vision to create a free and competitive market environment where the financial industry can emulate the success of the manufacturing industry. And this was the backdrop from which the FSC formulated and implemented a series of policy initiatives on deregulation, privatization, and financial globalization.
In respect of deregulation, all the rules and regulations were closely scrutinized and those determined to be unnecessary were swiftly repealed. At the same time, the FSC beefed up consumer and market protection measures. We also drafted legislation on the privatization of government stakes in Korea Development Bank and other financial institutions with the goal of enhancing efficiency and competition in the banking sector and fostering the growth of home-grown global banking institutions. We also stepped up our work on drafting regulations in support of the Financial Investment Services and Capital Markets Act, which promises to significantly reinvigorate Korea's capital markets.
Korea, like many advanced economies, was badly hit by the global financial crisis that quickly spread across markets following the collapse of Lehman Brothers last September. Although the crisis unfolded in the United States, its impact on the Korean economy was unexpectedly severe.
For one, foreign investors withdrew approximately $19 billion from Korea's stock markets _ one of the most liquid markets among the emerging countries _ during the second half of 2008 alone. Notwithstanding foreign exchange reserves of $240 billion, the Korean won also tumbled under pressure from incessant but groundless speculations over a looming currency crisis and from the ``stigma'' of having experienced a major financial crisis more than a decade earlier. Since then, Korea's policymakers have had to contend with two exigencies: securing legislative approval for the financial market reform packages and extinguishing the fire sparked by the global financial crisis.
Early on, the FSC identified what ailed the market and acted decisively. First and foremost, the flagging investor confidence had to be reversed in order to stem the slide of the Korean won. So we reassured the market by earnestly disseminating information on the scale of foreign liabilities and the foreign exchange reserves in the most transparent fashion and by issuing foreign debt guarantees for domestic banks. It must also be said that the currency swap arrangement the Bank of Korea reached with the U.S. Federal Reserve on October 30 was instrumental in reversing the slide of the Korean won.
Second, we contained the impact of the crisis by injecting hefty liquidity to the credit market. In a coordinated move, the Bank of Korea aggressively cut interest rates with an eye to holding back mortgage loan defaults that could spill over to banks and hamper their ability to lend. A bond fund of 10 trillion won was also quickly set up to keep credit flowing in the market.
Third, we encouraged continued bank lending to moderate the contraction of the real economy. In this endeavor, public credit guarantee funds were expanded to facilitate credit flows to small- and medium-sized enterprises, and a bank recapitalization fund of 20 trillion won was set up to help banks shore up their capital and step up their lending. The FSC also took steps to augment support to small business owners and low-income families in obtaining credit.
Fourth, the government reinstituted the business restructuring scheme that it had used successfully during the crisis years in late 1990s to eliminate market uncertainties associated with troubled companies and their creditor banks. In the first round of restructuring, the creditor institutions selected 16 construction firms and shipbuilders for workout, and our expectation is that this will be an ongoing process with more to come, if necessary.
The crisis response by the government to date will not measure up to everyone's expectations in every aspect, but I suspect that it merits better a passing grade. In responding to the impact of the global financial crisis, both the government and the market benefited from the legal and institutional arrangements and understanding that were established during the 1997 financial crisis.
To be sure, the global financial crisis is very much ongoing and its impact will continue to reverberate throughout the global economy for some time to come. Because Korea is an open economy with comparatively heavy reliance on international trade and finance, we do expect further difficulties ahead as the crisis runs its course.
But there should be no doubt about the fundamental strengths and the resilience of the Korean economy. Korea's fiscal position continues to remain sound, its world-class exporters are on a firm footing, its agenda for economic renewal and revitalization is on track, and its lessons from the earlier crisis are well heeded.
So I am more than optimistic that Korea will yet again prove the skeptics wrong and overcome challenges it faces. In many ways, we are paving a new road for the future, and we do expect to encounter unforeseen obstacles ahead. But every one of us at the FSC is forging ahead with paving the new road, a bold vision to transform Korea's financial industry into the next engine of growth. Even in times of daunting adversity, it's a worthy goal to pursue and we intend to get it done.
Financial Services Commission (FSC) Vice Chairman Rhee Chang-yong, 48, has spearheaded the country’s countermeasures against the ongoing financial crisis. Under his stewardship, the FSC has come up with preeemptive policies to minimize the negative effect of the financial distress over the past year. After graduating from Seoul National University, he obtained his Ph.D. in economics at Harvard University in 1989 and he taught at the University of Rochester in New York. Five years later, he returned to Seoul National University, his alma mater, to take a professor’s job and gained prominence as a top-tier economist here. He assumed the vice chairmanship of the FSC, the country’s top financial policymaker, last March under the Lee Myung-bak administration. voc200@koreatimes.co.kr |