As discussions on the reorganization of the financial authorities of the new government are underway, the Bank of Korea is pushing for enhanced supervisory powers by demanding exclusive inspection rights for financial institutions and the authority to request data from non-bank financial institutions. This is because, unlike major country central banks, it lacks tools for soundness management, making it difficult to respond proactively to instability in the financial system.
Such discussions are expanding under the argument that changes are needed in macroprudential policies overall. Macroprudential policies refer to measures aimed at minimizing the negative impact of risks in the financial sector on the real economy. They were introduced following the global financial crisis in 2008, as the recognition emerged that the stability management of individual financial institutions must extend to managing soundness at the system-wide level. Examples include collateral recognition ratios (LTV), total debt service ratios (DTI), and total debt repayment ratios (DSR).
◇ The Bank of Korea only has the joint inspection rights of banks… and cannot even request data from non-banks
According to the financial sector on the 24th, Bank of Korea Governor Lee Chang-yong expressed the view that the strengthening of the Central Bank's supervisory rights is necessary during the keynote speech at a conference co-hosted by the Bank of Korea, the Asian Development Bank (ADB), and the Journal of International Money and Finance (JIMF) on the 16th. He noted that "The Bank of Korea lacks macroprudential policy tools and micro-supervisory authority, which reduces the speed and effectiveness of policy responses," urging for the enhancement of the Bank of Korea's authority to resolve these issues.
The Bank of Korea's demands stem from the necessity for integrated management of financial institution soundness. In Korea, under banking supervision regulations, the authority over macroprudential policies such as DSR and LTV is held by the Financial Services Commission. Additionally, microprudential policies such as solo inspection rights are held by the Financial Supervisory Service (FSS). Since relinquishing banking supervisory authority to the FSS during the 1998 financial crisis, the Bank of Korea can currently only request joint investigations and inspections of financial institutions from the FSS.
The situation is even more challenging in practice. Within banks, even when conducting joint inspections, the attitude towards FSS and Bank of Korea personnel, who have solo inspection authority, differs, and the quality of data provided by the inspected institutions is also perceived to be different. If data is needed on non-bank financial institutions, it must be requested from the FSS, but it has been said that difficulties arise in obtaining the desired information due to differing attitudes towards macroprudentiality between the two institutions.
Relatedly, on the 10th of last month, the Bank of Korea labor union issued a statement noting that "The Financial Services Commission is primarily responsible for macroprudential policies, and the cooperation system with the Bank of Korea and other financial stability-related agencies is only at a formal level," highlighting that "The harmonious operation of macroprudential policies and monetary policies is being restricted.
이와 관련해 지난달 10일 한은 노조는 입장문을 내고 "금융위가 거시건전성 정책을 주로 담당하고 있으며 한은 등 여타 금융안정 유관기관과의 협조 체계는 형식적인 수준"이라면서 "거시건전성정책과 통화정책의 조화로운 운용이 제약되고 있다"고 지적했다.
◇ At major countries, central banks are a pillar of soundness policies… "The Bank of Korea should raise its voice"
In contrast, central banks in major countries such as the United States, the European Union (EU), and the United Kingdom are taking an active role. The chair of the Federal Reserve System (Fed) participates as a commissioner in the Financial Stability Oversight Council (FSOC), which operates macroprudential policies, and the Fed's board can directly create soundness regulatory standards for financial institutions. If any financial institution deviates from regulatory standards, it can recommend that the supervisory agency take action in writing. Direct supervision is also possible for major banks.
In the EU, central banks are also responsible for a pillar of the macroprudential policy operational system. According to the European Systemic Risk Board (ESRB) in 2014, out of 29 member countries, 13 countries have central banks solely responsible for macroprudential policies, while 8 countries manage them through committees led by central banks in conjunction with related agencies. The European Central Bank (ECB) exercises supervisory authority over financial institutions in the eurozone through the Single Supervisory Mechanism (SSM).
The United Kingdom has assigned greater responsibilities to its central bank. In 2013, the existing integrated supervisory body, the Financial Services Authority (FSA), was dismantled, integrating microprudential supervision and macroprudential policy functions into the Bank of England. Additionally, it established a Financial Policy Committee (FPC) to oversee macroprudential policies, while the existing FSA was restructured into the Prudential Regulation Authority, an agency under the Bank of England, centralizing powers of financial institution supervision.
The governor also pointed out these aspects. He stated during a press conference after the Monetary Policy Committee on the 10th that "A governance structure must be established that allows the Bank of Korea to raise its voice and strongly implement macroprudential policies," demanding an increase in authority. Based on these opinions, the Bank of Korea presented a 'financial stability policy system reform plan' focusing on securing solo inspection rights for financial institutions and macroprudential management policy tools during a report to the National Planning Commission last month.
So far, the financial sector generally maintains a negative stance toward the Bank of Korea's voice. The Financial Services Commission argues that supervisory and inspection authority is an administrative power that should be held by government agencies, not private organizations. Financial institutions are concerned that with an increase in the number of agencies with solo supervisory authority, regulation could increase. A contact in the financial sector stated, "Just having a regular inspection makes everyone, from the CEO to the lowest-level employees, anxious, and if the number of institutions with inspection authority increases, the burden on banks will grow."
However, the Bank of Korea maintains that continuous discussions are needed. A Bank of Korea official remarked, "This does not necessarily mean that exercising solo inspection authority is absolutely correct, but rather that we should discuss the best way to manage financial institutions from a macroeconomic perspective," adding that "Since the Bank of Korea plays the role of the lender of last resort for financial institutions, there is a need to review inter-agency coordination to proactively address crises.