Czar!

By Kang Seung-woo

Since his appointment less than two weeks ago, new Financial Services Commission (FSC) Chairman Kim Seok-dong has hogged the spotlight by reiterating the government’s extraordinary power over the financial market.

The 57-year-old former vice finance minister whose signature quote is “The state governs, ergo it exists,” has already brought a high degree of discipline to major financial services companies, which are rushing to buy debt-strapped savings banks, complying with his hard-line tone on hammering out the their woes.

But market watchers say that Kim’s strong leadership, reminiscent of the government-led financial order seen prior to the 1997-1998 financial crisis, may prove to be anachronistic.

“There is no country where major commercial banks are marching to the government’s order to offer microcredit to those in trouble,” Kim Sang-jo, an economics professor at Hansung University and executive director of Solidarity for Economic Reform, told The Korea Times. “In addition, savings banks’ massive insolvencies are due to the financial regulators’ sluggish monitoring as well as mismanagement by the lenders.

“But Kim’s order, which transfers its failure to oversee savings banks to major banks is another makeshift move to buy time.”

“Above all, this is not a favorable way to seek in dealing with troubled savings banks in that the government is twisting arms of major lenders, while forcing them to rescue the troubled savings banks,” Kim said.

Local savings banks, which offer loans to people and companies that have trouble accessing banks due to their low credit rating at higher interest rates, have become one of the key hurdles to an economic recovery and the financial market rebound, as a growing number of loans extended by them ran high risks of turning sour due to the slumping property market.

Kim is a renowned career technocrat who has plenty of experience in economic and financial policymaking.

He has played a troubleshooter from the government side in many major events in the finance industry over the past two decades, shuttling between the finance ministry and the financial regulating body.

Kim, a native of Busan, played a leading role in the 2003 sale of the Korea Exchange Bank (KEB) to Lone Star private equity firm and he was also in charge of the finance ministry’s taskforce during the credit card crisis of 2003, real estate policy reform of 1995 and financial regulation reform of 1997.

He served as the vice chairman of the defunct Financial Supervisory Commission (FSC) from 2006 to 2007, and then spent a year as a vice finance minister to February 2008 for former President Roh Moo-hyun.

However, despite his decorated career, he is better-known in the market for his propensity to advocate the government wielding strong power in supervising the financial market, backed by the famous line, which concerns the industry.

“Because of his propensity to emphasize the government’s strong role in the private sector, there are some concerns that it will distort or disrupt the market,” said a Seoul-based economist.

When Kim officially took office last week, he spoke on the strong role of the government.

“The government will take strict measures against whoever is found to have disrupted or distorted the financial market,” he said. “When concerns over market failure grow, the government will take an active role in stabilizing it as the nation’s top financial regulator.”

James Rooney, vice chairman of the Seoul Financial Forum, said that Kim’s modus operandi can lead to unhappy outcomes.

“The role of independent and observant regulators is crucial for sound and stable financial systems. Regulators should look for what is missing from the system, should look out for practices that could become dangerous for the health and stability of the system, and importantly should take an overall view that is often impossible for any other individual player to take because they have greater access to important information and a greater opportunity to understand that information in proper and useful ways,” he said.

He added that the government’s intervention will create two dangers, both of which can become serious.

“First, the restriction or distortion of the market can artificially divert activity away from healthy market balancing that is essential to market stability, and lead to distortions that are worse than the problem they were meant to solve. Or secondly the restrictions or distortions can hide or mask problems that would otherwise be naturally visible. This would be like a doctor not realizing that a patient is seriously ill because the fever has been hidden by medication or a painkiller,” he said.

“Both of these problems were continuously occurring in Korea for 10 years before we experienced the ‘IMF Crisis’ in 1998.”