Asia and Pacific > Korea, Republic of

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Jihad Dagher
Financial crises are traditionally analyzed as purely economic phenomena. The political economy of financial booms and busts remains both under-emphasized and limited to isolated episodes. This paper examines the political economy of financial policy during ten of the most infamous financial booms and busts since the 18th century, and presents consistent evidence of pro-cyclical regulatory policies by governments. Financial booms, and risk-taking during these episodes, were often amplified by political regulatory stimuli, credit subsidies, and an increasing light-touch approach to financial supervision. The regulatory backlash that ensues from financial crises can only be understood in the context of the deep political ramifications of these crises. Post-crisis regulations do not always survive the following boom. The interplay between politics and financial policy over these cycles deserves further attention. History suggests that politics can be the undoing of macro-prudential regulations.
Mr. Jongsoon Shin
This paper describes issues in Korea’s corporate sector, the need for restructuring, and the authorities’ initiatives and challenges. It then identifies lessons from other countries’ experience and conducts an econometric analysis based on cross-country aggregate data, compared with previous studies which mostly use firm-level data. This analysis finds that restructuring episodes, while sometimes challenging in the short term, have typically been associated with more rapid economic growth afterward. Corporate restructuring could have a negative effect on the labor and the financial markets in the short term, but is associated with positive growth through increased investment and capital productivity in the medium term, outpacing the negative effects.
International Monetary Fund. Monetary and Capital Markets Department
Korea experienced significant financial distress in the late 1990s along with some of its Asian neighbors. The authorities’ experience in handling this crisis and the experience in handling the fallout from the global financial crisis in 2007–08 helped them establish a broad crisis management framework in Korea. Improving and formalizing the framework for crisis management would help preserve and build upon institutional memory. Authorities can consider formally setting up an apex forum for leading the inter-agency cooperation and coordination work on crisis preparedness and crisis management. With a view to avoid duplication, the authorities may consider upgrading the Macroeconomic Financial Meeting (MEFM) with participation by the heads of the Ministry of Strategy and Finance (MOSF), Financial Services Commission (FSC), Financial Supervisory Service (FSS), Bank of Korea (BOK), and Korea Deposit Insurance Corporation (KDIC) as members, and by including crisis preparedness and crisis management as an explicit mandate. The essential elements of a financial safety net are available in Korea, and the Emergency Liquidity Assistance (ELA) framework and deposit insurance system can be improved to make the safety net more responsive. For ELA, this can be achieved by reviewing and revising the legal and procedural aspects to remove any scope for delays in actual disbursement of funds. For deposit insurance system, improvements can be made by bringing the deposit insurance fund out of deficit, and assuring a back-up funding. The financial safety net is well supported by an efficient framework of financial sector supervision. While the corrective action framework has some of the main elements in place it can, among others, be improved in the following areas for better effectiveness: (a) reviewing the triggers for corrective actions and improving their objectivity to enable timely intervention, including even before banks breach regulatory thresholds; and (b) putting in place norms and guidance determining the use of the powers to postpone or suspend corrective actions.
International Monetary Fund. Monetary and Capital Markets Department
This Financial System Stability Assessment report on the Republic of Korea highlights that the Korean economy is experiencing a modest recovery, helped by supportive monetary and fiscal policies and buoyant exports. GDP growth is expected to rebound to 2.8 percent in 2013, and strengthen further to 3.7 percent in 2014, in view of the projected global recovery and a gradual pickup in domestic demand. Inflation has fallen to 0.7 percent in October 2013 from 4.2 percent in 2011. With stronger exports and muted domestic demand, the current account surplus has widened and is expected to reach about 5.5 percent of GDP in 2013.
Cheng Hoon Lim, Mr. Rishi S Ramchand, Mrs. Helen W Wagner, and Mr. Xiaoyong Wu
This paper surveys institutional arrangements for macroprudential policy in Asia. Central banks in Asia typically have a financial stability mandate, and play a key role in the macroprudential framework. Smaller and more open economies with prudential regulation inside the central bank tend to have institutional arrangements that give the central bank a leading role. In larger and more complex economies where prudential regulation is outside the central bank, the financial stability mandate is usually shared with other agencies and the government tends to play a leading role. Domestic policy coordination is typically performed by a financial stability committee/other coordination body while cross-border cooperation is largely governed by Memoranda of Understanding.
Ms. Eva H. G. Hüpkes, Mr. Michael W Taylor, and Mr. Marc G Quintyn

Abstract

Policymakers are often reluctant to grant independence to the agencies that regulate and supervise the financial sector because of the fear that these agencies, with their wide-ranging responsibilities and powers, could become a law unto themselves. This pamphlet describes mechanisms for making regulatory agencies accountable not only to the government but also to the industry they supervise and the public at large, with examples from a range of countries.

Ms. Eva H. G. Hüpkes, Mr. Michael W Taylor, and Mr. Marc G Quintyn

Abstract

Les décideurs rechignent souvent à accorder l’indépendance aux agences qui réglementent et supervisent le secteur financier, car ils craignent que ces agences, avec leurs responsabilités et leurs pouvoirs étendus, puissent imposer leur loi. Cette brochure décrit les mécanismes permettant de garantir que ces agences soient redevables non seulement envers l'État, mais également envers le secteur qu'elles supervisent et envers le grand public, et propose des exemples de divers pays.

Ms. Eva H. G. Hüpkes, Mr. Michael W Taylor, and Mr. Marc G Quintyn

Abstract

Policymakers are often reluctant to grant independence to the agencies that regulate and supervise the financial sector because of the fear that these agencies, with their wide-ranging responsibilities and powers, could become a law unto themselves. This pamphlet describes mechanisms for making regulatory agencies accountable not only to the government but also to the industry they supervise and the public at large, with examples from a range of countries.

Ms. Eva H. G. Hüpkes, Mr. Michael W Taylor, and Mr. Marc G Quintyn

Abstract

Las autoridades de política económica suelen ser renuentes a otorgar independencia a los organismos que regulan y supervisan el sector financiero debido al temor de que estos organismos, con responsabilidades y poderes de amplio alcance, puedan convertirse en una fuente normativa por sí mismos. Este folleto describe los mecanismos para que los organismos reguladores rindan cuentas no solo ante el gobierno sino también ante la industria que supervisan y el público en general, con ejemplos sobre una amplia gama de países.

Ms. Eva H. G. Hüpkes, Mr. Michael W Taylor, and Mr. Marc G Quintyn

Abstract

Policymakers are often reluctant to grant independence to the agencies that regulate and supervise the financial sector because of the fear that these agencies, with their wide-ranging responsibilities and powers, could become a law unto themselves. This pamphlet describes mechanisms for making regulatory agencies accountable not only to the government but also to the industry they supervise and the public at large, with examples from a range of countries.