Chin Calls for Faster Financial Reform
Warns Against Excessive Risk-Taking Through Shadow Banking, Herd Behavior
By Kim Tae-gyu
Staff Reporter
The country's top financial policymaker has stressed the need for broad-based reform to preclude a recurrence of the financial crisis in the future.
In a special contribution to The Korea Times on the occasion of a Financial Stability Board (FSB) plenary meeting in Paris, Financial Services Commission Chairman Chin Dong-soo expressed concern Wednesday that the hard-earned momentum for financial reform may weaken.
"As the global economic condition shows signs of recovery and the near-bankrupt financial institutions start making enormous profits, there is a broadening concern that the momentum for reform is slipping and the window of opportunity for accomplishing visible change is closing, with the 'business as usual' attitude and excessive risk-taking activities reviving," Chin said.
Along the same lines, Chin cautioned against the herd behavior among financiers who blindly seek to gain profit without due consideration of risks as one of the reasons lurking beneath systemic risks.
"It has been recognized that in order to minimize systemic risk arising from interconnectedness among financial institutions and markets as well as the herd behavior, we need a well-balanced system of both micro- and macro-prudential supervision and regulation," Chin said.
The life-time bureaucrat also advised CEOs against seeking prohibitively high perks on short-term profits, which are possible through excessive risk-taking.
"Concerns have been raised that unreasonable compensation practices based on short-term profits for executives and employees of financial institutions resulted in excessive risk-taking activities," Chin said.
As viable ways of fighting against the specter of excessive risk-taking, Chin proposed sweeping financial reform spearheaded by the FSB underpinned by G20 leaders.
"Despite such concern (over excessive risk-taking and strained reform), we have no doubt that the FSB will be determined to move ahead with the financial reform as planned, with unwavering and strong support from the G20 leaders," he said.
"Thus, discussions are in progress to promote sound compensation practices for the industry. In support of the previously announced compensation principles set by the FSF, detailed guidelines are currently being devised by the FSB and will be discussed more thoroughly at the upcoming Pittsburg summit," he added.
As the predecessor of the FSB, the FSF or Financial Stability Forum was established in 1999 by G7 nations, and was expanded to the FSB covering all G20 members earlier this year to efficiently cope with the financial crisis.
The second plenary meeting of the FSB took place this week in Paris to discuss how developed countries can collaborate to control cross-border risks. The Basel-based panel will submit two reports to the Pittsburgh summit of G20 slated for Sept. 24 and 25.
"The report contains proposals for a wide array of issues including strengthening the global capital framework, making global liquidity more robust, reducing moral hazards posed by systemically important institutions, and improving compensation practices,"Chin said.
"An in-depth discussion took place at the plenary meeting especially on the issue of how to stabilize the foreign currency liquidity in emerging countries. This particular subject has been adopted as an official part of the meeting agenda as we proposed based upon our own experience in the current crisis," he added.
Chin raised the issue of foreign currency market stability at the biannual FSB session as Asia's fourth-largest economy suffered extreme volatility in the foreign exchange markets over the financial debacle.
Chin also stressed that countries, including Korea, should reduce the size of "shadow banking" such as hedge funds and off-balance sheet entities and minimize regulatory gaps.
Toward that end, the FSB reviewed measures to expand the scope of regulation to cover all systemically important financial institutions, multi-national banks or insurers based mostly in G7 countries.