 Presidential advisor |
WASHINGTON ― The currency war, quantitative easing and stock and commodities market rallies ― these symptoms of a boiling global capital market are making countries rethink about the need to adopt macro-prudential tools such as the global bank levy, top South Korean officials said on Thursday and Friday.
Shin Hyun-song, professor of economics at Princeton University and special economic advisor to the South Korean president Lee Myung-bak, said Thursday that the G20 leaders can make a shift to the idea of bank tax and other macroprudential crisis-prevention tools when they write a joint statement at the Seoul Summit in November.
“Many countries around the world are becoming serious about the side-effect of excessive cross-border capital flow. Korea knows this risk very well because of two crises it had had. And now it has become a worldwide phenomenon,” Shin told The Korea Times on Thursday, after attending a World Bank discussion on capital flow management. “This is a boom time for financiers, especially for large global banks. But underneath this boom, there can be a crisis in the making.”
Kim Choong-soo, the governor of Bank of Korea, concurred with Shin, that the macroprudential policies "are becoming a key issue in the global economy," and that Seoul will follow the global trend.
"There will soon be discussions on how to develop the macroprudential policies," he said on Friday during a breakfast meeting with reporters. "The most critical issue now is how to make the economy less vulnerable to cyclical changes."
Kim also said that the central bank should seek a more broad role in the process of developing and implementing such policies.
Macroprudential tools refer to policies of wider scope that prevent financial firms from investing more than they can afford. The term differs from micro-level supervision of banks by regulators. Korea has had implemented a series of successful macroprudential policies in foreign exchange derivatives and real estate loans. Kim said that with these efforts, Korea can set a role model for other emerging nations that want to open up their capital markets.
For one of the options of the global macro-level policy, Shin, and the IMF have suggested to the G20 that banks can pay a certain percentage of their non-deposit liability as tax, in order to discourage them from taking too much liability when the economy seems to be in a boom. The Korean government has been studying the option ever since the latest financial crisis.
This scheme of global, universal bank levy has been dropped at the Toronto G20 Summit in June as Canada and some other countries feared that it might undermine the business of their financial firms. But recent development in the global economy suggests that more and more countries are beginning to fear the excessive capital movement across border, Shin said.
Warnings are raised that money is flowing too fast to emerging economies from advanced economies for various reasons ― interest rate differences, gaps in economic potential, imbalanced currency exchange rates, and expansionary monetary and fiscal policies in almost all nations.
The rise of the macroprudential debate means that the G20 nations may want to expand the agenda of Seoul Summit in November beyond what has been agreed so far, Shin said. France also wants to address the reform of the international monetary system in Seoul, in a preparation for next year's summit to be held in Paris.
It is not unusual for the summit's agenda to be comprehensive. The G20 summit meeting usually produces a statement called Communique at the end of the event as its mutually agreed policy goal. The member nations can include future debate topics onto the statement, so that they can build on from the basis in the next meeting.
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