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Restoring a watchdog’s prestige

Kim must discuss his specific policies to ease the market’s concerts.
Apr 07,2018
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Insiders from the ruling party and administration are saying that President Moon Jae-in named Kim Ki-sik, former member of a human rights and democracy organization, as the new head of the Financial Supervisory Service (FSS) to reform the financial sector.

“The appointment shows that Moon wants financial reform quickly,” one source said. “He is the best person to reform the financial sector,” said another. The market is anxiously waiting for Kim’s decisions.

As Kim said in his inauguration speech, the prestige of the FSS has plummeted, and a major overhaul is necessary to restore its authority as a watchdog. Kim did not mention the specific direction of his reform plan, and only mentioned his belief in some basic principles, fueling the market’s curiosity.

In his speech, he said he would faithfully execute the FSS’s supervisory role, strengthen consumer protection and win the market’s trust with predictable policies.

His plan is no different from the other reform plans of the FSS and the Financial Services Commission (FSC) over the past years. Therefore, there is no need for the market to feel insecure about a new direction for the FSS.

The FSC and the FSS, during the Park Geun-hye administration, pushed forward market-friendly reform measures on financial supervisory policy, including checks and sanctions.

The last administration’s financial reform began with a 2013 world competitiveness report that ranked Korea’s financial industry behind Uganda. In this year’s evaluation, Korea’s financial development passed Uganda and was ranked 74th. But the chaos between the FSS and Hana Financial Group makes us wonder if the reform measures really were successful. The FSS and financial markets are under pressure since the Moon administration began.

Revisiting why reform efforts failed is important for Kim to decide the course of his reform plan. Why did his predecessors fail to faithfully carry out the duties of the FSS? Despite its efforts to protect financial consumers, why are Korean financial companies called plunderers?

Kim gave the answers in his inauguration speech. He said the principles of financial supervision were distorted by political and policy considerations, and vowed that this will not happen under his watch. Because each and every administration used financial supervision as a tool to push forward its policies, flaws were created and the financial supervisory system was damaged.

Despite Kim’s promise, the market is still concerned that he will act politically because he is a politician appointed by a liberal administration. Concerns are particularly high that supervision of financial groups under conglomerates will be strengthened after a policy of integrated supervision of financial groups starts in July.

Reforms failed because the so-called market-friendly reform measures dissolved financial regulations.
Kim must pay attention to this contradiction. Until now, the FSS and FSC not only reformed evaluation and sanctions systems but also expanded the scope of supervision to ownership structure improvements for financial companies and supervision of financial groups. During the process, the systemic mechanism that was intended to regulate supervision was weakened under the justification of market-friendly reform.

The scope of supervision was also expanded, worsening problems and undermining the authority of watchdogs. Kim, therefore, needs to find a balance between market-friendly reform and the FSS’s ability to supervise.

The frequent turnover of FSS heads and continuous reform drives have resulted in fatigue in the organization and the financial industry, which Kim much take seriously. Kim needs to make efforts to persuade them about the desperate need for reform and specific direction and show a new leadership of empathy. The issue of Hana Financial Group, in particular, is seen as a test of his leadership.

As he promised in his speech, the most important financial reform is establishing a precedent that the financial supervisor’s principles will not be distorted by political and policy considerations.

Kim must discuss his specific policies to ease the market’s concerts and create an opportunity to restore the FSS’s prestige.

Translation by Korea JoongAng Daily staff

JoongAng Ilbo, April 5, Page 29

*The author is a visiting professor of economics at Korea University.

Kim Dong-won