The FSB Conference of Financial Reform in Seoul

The importance of FSB conference in Seoul

It is significant that the FSB conference was held in Seoul, because it is the first meeting in the emerging country. Korea dealt with Asian financial crisis in 1997, and managed the global financial crisis in 2008 efficiently. In addition, member states expect that Korea will have the leading role in the financial reform as a chairman country of G20.

Topics come up for discussion by Korea

Korea selected items for an agenda mainly from the perspective of the chair position of G20 and emerging country. As chair position of G20, Korea focused on the agreement of several topics related to the financial regulation among member states. Furthermore, as an emerging country, Korea poses a question regarding the importance of global safety net.

There are several issues suggested by Korea. The global SIFI would be separated from the domestic SIFI, leading to the heavy regulation. In order to increase the participation of emerging states, it is necessary to share the information between the home and host country. In terms of the establishment of IFRS and the dependence on the credit agency, the opinion of emerging states should be included.

The results of the FSB conference

1.      The regulation on the asset of banking industry

After the global financial crisis in 2008, the banking industry would extensively recover. Thus, the liquidity risks should be prepared. At Sep. 12, each country reached to the agreement of calibration and phase-in arrangement in BCBS meeting. The asset regulation will be implemented in 2013, and the degree of regulation will be gradually increased until 2018.

 

2.      The heavy regulation on SIFI

The real economy in the large number of countries is affected by SIFI. This is why the liquidation of the huge SIFI is difficult. Instead of that the public funds will be provided. This might lead to the moral hazard in financial sector. Thus, the resolution would be the higher loss absorption capacity. It should be implemented in global SIFI first. Due to the huge impact on many institutes and even whole country, it is essential for SIFI to have the capacity of liquidation. On top of that, other regulation should concentrate on lower the possibility of failure base on the intensity of SIFI supervision. Peer review council will confirm the consistency and effectiveness in SIFI supervision.  

 

3.      The standardization and transparency of derivatives traded through over-the-counter

The weak regulation on OTC derivative market leads to the severe financial crisis in 2008. The central clearing with standardized derivatives is encouraged. In addition, the regulation on the central counterparties will be increased.

 

4.      The decrease in the dependence on the credit agencies

The FSB approved the principles regarding the decrease in the dependence on credit agencies. Accordingly, legal codes should not be based on the rating given by credit agencies. The credit rating conducted by banks, institutional investors and market participants will be encouraged.

 

5.      FSB outreach program

The FSB encourage the participation of member states and non-member states by setting up the regional groups. This leads to the active implementation of global regulation. The outreach program will be specified with extra discussion.

The summary and expected effect of financial reform in FSB conference

The financial reform will contribute to the recovery of financial system. The regulation on the soundness of banking industry will result in the higher loss absorption capacity with superior financial structure. The heavy supervision on SIFI will lead to decrease the problems of moral hazard caused by too-big-to-fail. The transparency in the OTC derivative market, which is one of the causes of financial crisis, will be improved. Lastly, the real economy will have the positive impact regarding sustainable growth, thanks to the stability in financial system.

Min Gyo Jeong (misomk@naver.com)

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