Financial regulator under seige
Korea looks to ‘twin peaks’ approach to financial regulations after scandals
By Jung Sung-ki
Established in 1999, the Financial Supervisory Service (FSS), South Korea’s integrated financial regulator, played a pivotal role in helping the government recover from the 1997-1998 Asian financial crisis that swept the country.
Under a financial regulatory reform initiated in 1998, the service consolidated the office of Bank Supervision, the Securities Supervisory Board, the Insurance Supervisory Board and the Non-bank Supervisory Authority. The FSS is under the broad oversight of the state Financial Services Commission (FSC).
The service is renowned for leading an intensive restructuring of the financial industry, eliminating insolvent financial firms and putting the financial sector back on track through 2003.
After more than a decade, however, the shoe is on the other foot, as the unified financial watchdog is now facing growing calls for an overhaul after a series of scandals apparently revealed a lack of transparency in management and monitoring of financial irregularities, as well as moral hazard among its employees.
Troubles with the savings bank sector were a case in point. The FSC suspended the business operations of eight savings banks earlier this year for capita shortages, with one of the savings bank being sold in March to Woori Financial Group.
The prosecution has also expanded its investigation into allegations that some FSS officials overlooked irregularities of capital-lacking savings bank embroiled in a 7-trillion won ($6.4 billion) financial corruption scandal.
A senior FSS official was arrested earlier this month on charges of taking 100 million won from Busan Savings Bank’s chairman in return for overlooking the bank’s illegal acts. A dozen former and incumbent FSS officials have been arrested for receiving bribes from insolvent savings bank officials.
Against this backdrop, calls are mounting to spread the regulatory power among other financial authorities to ensure an effective “checks and balances” system.
Some financial experts say the Bank of Korea (BOK) needs to be given an independent inspection right to investigate financial firms in question. By doing so, macro-prudential supervision will be strengthened further, they say.
The BOK is currently entitled to request the FSS to perform a joint examination of banks or other financial institutions, whenever its monetary policy committee deems it necessary for the stability of the local financial market.
“Timing is important in controlling any financial problem,” a former official of the Ministry of Strategy and Finance told Business Focus on condition of anonymity. “It’s true that the BOK is lacking knowhow on financial supervision since it handed over the function to the FSS 12 years ago, but the BOK should have the authority to examine whether or not local banks and other financial firms manage their financial soundness properly.”
The official added the roles of the FSS and BOK in financial supervision could be divided effectively. The BOK should focus more on monitoring macro-economic developments that might impact on financial stability as well as on market risk management, while the FSS would be responsible for micro-prudential supervision on soundness or health of financial firms and their business operations.
“Without coordination between supervisory agencies, financial and monetary soundness cannot be monitored properly,” the official said. He added the finance ministry could work as a coordinator between the two organizations if required when it comes to the timing of their financial examinations.
Lee Man-woo, a professor of Business Administration at Korea University in Seoul, was skeptical about the so-called twin financial regulatory framework.
“It will take scores of years to set up a skilled financial regulator like the FSS. So it’s much better to maintain the current unified system,” Lee said.
Instead, the professor noted, the investigative authority of the Korea Deposit Insurance Corporation should be strengthened to prevent the recurrence of such a fiasco involving savings banks.
After the 2008 global financial crisis, major economies in the world have had second thoughts on their financial regulatory structures and sought to improve financial supervision mechanisms.
The U.K. government decided last June to abolish the Financial Services Authority (FSA), an independent, non-government regulatory body. Instead the Bank of England was given wide-ranging powers in both monetary policy and financial regulation.
The FSA was replaced by a new prudential regulator that operates as a subsidiary of the enlarged Bank of England. A new Financial Policy Committee within the bank was given the power and responsibility to look at the macro issues that may threaten economic and financial stability and take effective action in response.
The U.K. established two other regulatory bodies: the Prudential Regulation Authority and the Financial Conduct Authority.
Last July, the U.S. Congress passed a bill for creating the Financial Stability Oversight Council (FSOC) designed to provide comprehensive monitoring to ensure the stability of the U.S. financial system. The legislation was aimed at closing the regulatory gaps and ending the speculative trading practices that had contributed to the 2008 financial crisis.
The council is charged with identifying threats to the financial stability of the United States; and promoting market discipline and responding to emerging risks to the stability of the U.S. financial structure. The Dodd-Frank act gave more power to the Federal Reserve in financial supervision.
Germany is also moving on changes to financial supervision. The gist is to strengthen the Bundesbank’s role in identifying systemic risks.
The central banks’ job of macro-prudential supervision is being extended to bolster their position at the European Systemic Risk Board. Financial regulator Bafin leads supervision of the banking sector, insurers and securities traders.
In Japan, the Financial Services Agency (FSA) serves as a regulatory authority of financial institutions. On the other hand, the Bank of Japan (BOJ) is not a regulatory authority per se under the Banking Act, but it conducts on-site examinations in order to maintain a safe and sound financial system.
China maintains three diversified supervisory agencies ― the People’s Bank of China, the Insurance Regulatory Commission of China, and the Securities Regulatory Commission of China ― but envisions an integrated financial regulator.