With FSS in hot water, it’s time to bring in KDIC
Following the revelation of its poor surveillance of troubled savings banks, the fundamental role of the Financial Supervisory Service (FSS) as the omnipotent regulator is being questioned.
The suggestion of pairing the FSS with the Korea Deposit Insurance Corp. (KDIC) in monitoring financial institutions is being given additional impetus. Empowering the KDIC with monitoring duties was pushed last year but nixed in the face of strong opposition from the FSS.
The FSS failed to prevent “illegal withdrawals” of a large amount of money from savings banks after business hours a day before the suspension of their operation.
“The FSS is the lone superintendant to brandish all supervisory power on financial players,” a Seoul-based economist said on condition of anonymity due to the sensitivity
Another economist said, “The FSS’s authority is based on the rights to supervise financial players, so it is afraid that its supervisory powers will be decentralized.”
The KDIC was established in June 1996 to protect depositors’ funds at KDIC-insured financial institutions and maintain the stability of the financial system.
Its major functions can be classified into five categories ― insurance management, risk surveillance, resolution, recovery and investigation.
For example, when a financial accident takes place at companies which hold deposit insurance, the KDIC instead pays up to 50 million won ($46,800) to each client.
Although the KDIC shoulders all burden from any such accidents at financial institutions, it has no rights to monitor them on its own in efforts to keep potential insolvency at bay.
“The best preventive measure is to find financial players showing signs of bankruptcy as soon as possible to keep them in check,” said a KDIC official.
“Due to an absence of relevant laws, it is like the day after a fair whenever a financial problem occurs.”
According to the state-run deposit insurance agency, there are two cases in which it dispatches its staff to financial companies.
First, when the Financial Services Commission (FSC), the decision-making unit of the FSS, appoints the KDIC as the supervisor of a financial firm under suspension.
The other scenario enabling the KDIC to supervise a distressed financial institution is when its board member faces a suspension of duty.
Financial industry insiders say that there should be a way to thrust the KDIC into a bankrupt financial firm beforehand in case of illegal deposit withdrawals because the agency, which is directly involved in the situation, can respond quicker than financial regulators including the FSS. The Federal Deposit Insurance Corporation (FDIC), the U.S. counterpart of the KDIC, is armed with the authority to monitor financial players around the clock.
In order for the insurance entity to have a bigger voice in the surveillance of financial companies, the FSC planned to empower the KDIC with supervisory authority, but to no avail after facing tough opposition from the FSS.
“It is a clear violation of the memorandum of understanding (MOU) signed between the FSS and the KDIC and disrespectful of the FSS’ know-how on supervision,” said an FSS official. “Given that we report our outcome from inspections of financial institutions which are struggling with insolvency to the KDIC it will be like performing repetitious work if the KDIC is authorized to independently check financial firms.”