Yoon Jeung-hyun, Governor of Financial Supervisory Service

By Yoon Jeung-hyun, Governor of Financial Supervisory Service

It is said that the financial industry is the keystone of the service sector. It not only allocates credit efficiently in support of the real economy, it can also generate high value-added services like no other. As such, continual development and growth of the industry is paramount if it is to become Korea's future engine of growth.

As a result of a decade of earnest efforts to restructure and revitalize the economy since the 1997 financial crisis, Korea's financial services industry has made significant strides. And, thanks to the arrival of global financial players, the industry's competitive landscape has improved significantly over the years. Within the industry itself, financial firms are racing each other to diversify risk, reduce cost, and find new growth opportunities.

Despite the progress to date, however, Korean financial firms continue to lag well behind global players in several key categories, such as the scale of assets or global competitiveness. World ranking by IMD and WEF, among others, more or less tell the same story.

For Korea's regulators, the overriding policy objective has been to secure the safety of financial system and advance the financial industry so that domestic financial firms can grow to compete in the global marketplace. So regulators have been reinforcing the soundness of the financial system to effectively counter market risks and revamping regulations to encourage financial globalization and conglomeration.

A Changed Landscape

Immediately following the financial crisis, the government took the lead in cleaning up distressed financial firms and utilized public funds to restructure and facilitate credit intermediation as it tried to restore calm and order in the market. At the same time, the government decided to integrate then-divided supervisory authorities to improve financial oversight and upgrade the supervisory system to higher standards.

Thus was born the Financial Supervisory Service. From its very beginning in early 1999, the FSS led the corporate/financial-sector restructuring drive and did its part in raising the supervisory standards and improving financial stability.

Restructuring in the financial sector led to, among others, unprecedented downsizing and industry consolidation. For example, the number of financial firms, which totaled 2,103 at the end of 1997, dwindled to 1,315 by the end of 2006. For their part, financial institutions focused on cleaning up and beefing up their balance sheet as well as economizing on their workforce. They also began to practice rigorous risk management. These efforts ultimately have paid off, as evidenced by the steady stream of strong earnings and enhanced asset soundness domestic financial firms have been reporting in recent years.

This is not to say all is well. On key issues such as global presence and competitiveness, domestic financial firms continue to lag behind the established global players as noted earlier. More recently, the financial market also has had fierce competition in domestic retail banking areas such as the rapid growth of mortgages.

And new market dynamics are emerging. Amid growing calls for greater corporate transparency and responsibility, companies are coming under close scrutiny and tough discipline from investors. For the financial industry, wide-ranging issues from shifting demographics and finding the next growth engines to competitive pressures from within and across financial sectors with the coming of the Capital Market Consolidation Act loom on the horizon.

Under the ever-changing financial landscape, financial firms will need to step up to the next level on the strength of their core business capabilities. In this transition, both scope and scale will matter. This is particularly true for securities companies if they are to successfully transform themselves into globally competitive investment banks. They should enlarge the size of the capital through M&A and move into such a lucrative area as trading and principle investment (PI). Insurance companies face similar challenges, especially now that the amended listing rules enable them to become publicly traded companies.

Korea's regulators stand ready to lend a helping hand to restructuring and consolidation in the financial industry that leads to the creation of large, well-capitalized financial services firms that can compete on the global stage. We share the goal of transforming Korea's capital markets into one of the world's top ten markets and will spare no effort in fostering efficient and transparent capital market growth while protecting investors.

The Road to Globalization

With the successful conclusion of the Korea-U.S. Free Trade Agreement (KORUS FTA), Korea has taken a step closer to globalization. While the KORUS FTA will certainly give a fresh boost to Korea's growth prospect, it is not a sure bet. For our part, we intend to take a fresh look at our legal and regulatory approaches and strive for globally harmonious legal and regulatory frameworks that can facilitate Korea's transition to a genuinely globalized economy.

In this transition, the importance of financial globalization cannot be emphasized enough. In today's globalized economy, it only makes sense that domestic financial firms set their sight on competing globally, i.e., competing in global marketplaces with a global mindset. As they do so, they must be able to help domestic companies grow overseas and give top-notch investment opportunities to investors at home.

A good place to start for domestic financial firms may be emerging markets in regions such as Southeast Asia and Central Asia. With high economic and income growth, demand for retail consumer finance services including household credit and credit card services is rapidly rising in these regions. For domestic financial service providers, this could potentially represent a new overseas growth area. The geographical proximity, cultural familiarity, an already active Korean business community, and relative infancy of these markets, could also give an added boost to domestic financial firms. The know-how on debt workout and disposition of distressed assets that Korean financial firms have accumulated over the years could also prove a competitive asset.

But it is difficult to imagine local financial firms succeeding in overseas markets along with global players without establishing a strong, competitive position at home first. And if they are to grow into truly global players, local financial firms will need to make more forward-looking investments, such as producing highly trained and skilled professionals.

In an era of globalization, Korea's global competitiveness will surely benefit from globally active and competitive financial firms. For their part, regulators will step up engagement with foreign and international regulatory organizations to foster harmonization and prevent cross-border friction. Korea's regulators will also continue to stay responsive to the market and forge ahead with regulatory reform to provide a level playing field and an effective regulatory environment for all.