Since the 1997-98 financial crisis, financial regulatory reform has been a recurring theme in presidential election campaigns. This time is no exception.
The thee main presidential candidates -― Park Geun-hye of the ruling Saenuri Party, Moon Jae-in of the main opposition Democratic Party and independent candidate Ahn Cheol-soo ― have each disclosed a plan to revamp the current financial regulatory system.
What motivated their proposals was last year’s savings bank scandal that starkly demonstrated the deficiencies in the system.
The worsening household debt problem also prompted the candidates to push for reform as it showed the lack of policy coordination among government agencies in addressing systemic risk.
The three main presidential hopefuls offer different solutions. Ahn was the first to present a reform plan. He calls for, among other things, abolishing the Financial Services Commission, an agency charged with the dual task of making policies to foster the domestic financial industry and setting the guidelines for its oversight.
The rationale for dismantling the commission is that its tasks are incompatible. The commission faces a conflict of interest: It has to promote financial companies’ growth and at the same time limit their risk-taking to keep the financial system stable.
Ahn proposes that the commission’s authority to formulate policies for the domestic financial sector be transferred to the Ministry of Strategy and Finance, which maintains jurisdiction over international finance.
He also calls for splitting the Financial Supervisory Service ― a watchdog that oversees financial companies under the guidance of the FSC ― into two organs, one in charge of prudential regulation of financial companies and the other responsible for protecting financial consumers.
Ahn also proposes the establishment of the Financial Stability Commission to facilitate coordination among the Finance Ministry, the Bank of Korea and other financial regulators in handling issues that threaten macroeconomic stability.
Moon’s scheme is similar to Ahn’s as it also proposes the dismantling of the FSC and giving its policy-making function back to the Finance Ministry. Moon differs from Ahn in handling the FSS.
Instead of splitting the FSS, he suggests that an agency dubbed the Financial Supervisory Commission be created to set regulations for the FSS and directly control its operations.
Park’s plan differs widely from those of the two opposition candidates as it calls for elevating the FSC to a full-fledged ministry by transferring the Finance Ministry’s jurisdiction over international finance to it.
She also plans to separate the Financial Consumer Protection Agency, which was set up following the savings bank scandal, from the FSS and make it an independent body.
These proposals attracted sharp reactions from FSC and FSS. FSC Chairman Kim Seok-dong opposed the plans to dissolve his commission, saying it helped the financial sector emerge from the 2008 crisis relatively unscathed.
Yet he expressed support for the separation of the consumer protection agency from the FSS, noting that financial policy has thus far failed to safeguard the interests of consumers properly.
In contrast, FSS Chairman Kwon Hyuk-se was against splitting the consumer agency, saying that the cost of making it an independent body would amount to 1 trillion won over five years. Yet he had no objection to disbanding the FSC, which would make the FSS more powerful.
The current financial regulatory framework is the product of a hasty overhaul by President Lee Myung-bak upon his inauguration.
Yet this time, any reform should be based on discussions among government officials, economists, regulators and industry representatives.
In reshaping the regulatory framework, the new system should be simple and efficient. The authority to make financial policies, both domestic and international, needs to be vested in a single agency, be it the Finance Ministry or the FSC.
One lesson from the savings bank debacle is that the agency for protecting financial consumers should be independent. The scandal illustrated the corrupt ties between FSS officials and the owners of insolvent savings banks, who abused huge amounts of customers’ money.
