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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)

Impacts of the Goldman Sachs Case on Financial Markets

Impacts of the Goldman Sachs Case on Financial Markets

In the wake of the civil action by the U.S. Securities and Exchange Commission (SEC) against Goldman Sachs on April 16, stock markets in the U.S. and Europe fell, and prices of the U.S. Treasury bonds and dollars rose. Click Here.

Press Release_ March 26th

Regulation on Bank’s Loan-to-Deposit Ratios

In the 2010 Financial Policy Agenda announced in December 2009, the FSC unveiled its plans to adopt banks’ loan-to-deposit (LTD) ratio as one of its bank liquidity guidance ratios, which aims to encourage sound management of banks and alleviating factors driving the asset competition among banks.  Click here.

Weekly e-Briefing 11. Financial Investors Express Card

Korean government has developed a new program called ‘Financial Investors Express Card’ program that enables financial investors of financial institutions that have committed significant amount of investment in Korea to use fast-track immigration lane at the airport.  For those who holds supervisory intra companies transfer visa and those whose operating capital is over KRW 7 billion could apply for this program.   Please visit http://www.fsc.go.kr/eng/index.jsp for more details.

Global trend in banking regulations

 

US president Barack Obama

  On January 21st, US President Barack Obama announced new regulations about financial institutions to limit the scope and size. The new regulations are going to separate investment and commercial banks with stringent regulations.

  Some people say that the new regulations are the revival of the ‘Glass Steagall Act’. The Glass Steagall Act was part of the New Deal policy that was imposed in 1933. Some people argued that the great depression appeared due to lax management of commercial banks. This assertion rose and promoted the Glass Steagall Act. Through this law banking, securities and insurance were totally separated. The Federal Reserve System was reinforced and ‘Securities and Exchange Commission (SEC) was established under the glass Steagall Act. However through separation in commercial bank and investment bank, companies had hardships in paying increasing procurement costs in long term investments. As a result, the Glass Steagall Act was abolished in 1999 and the US had to catch up with the global trend. The global trend in the financial industry has been a consolidation of banking, security business and insurance. Two good examples of this where Universal banking in Germany and Bancassurance in France .

  Since the start of the 2008 global financial crisis, there has been a growing need for strengthening regulations on financial institutions, particularly which used to be thought “too big to fail”. The reality is that the big banks, the freakish offspring of the Fed’s easy money are dangerous institutions, deeply embedded in a bull market culture of entitlement and greed. Consequently global attention focuses on reforming new financial systems. Barack Obama’s so called Volcker’s rule is cast in the same shadow as the Glass Steagall Act, as the new proposal prevents commercial banks from doing investment banking business.

Paul Volcker and Barack Obama

  So what happens if Volcker’s rule formulates the policy? It is too soon to tell. It would take time and efforts for Volker’s rule to be enacted and enforced. It is quite unclear that Volcker’s rule would fulfill its original purposes as it would cause lots of dissonance in separating commercial and investment banks. But we cannot deny the fact there is a need for global coordination in financial regulation.

  At the global level, there was a recent discussion about introducing a global bank tax. According to the Financial Times on Feb 11th, Britain’s Prime Minister Gordon Brown suggested there is an upcoming agreement on a global bank levy and at the G20 summit in June the various participating nations will try to reach an agreement about the levy. In addition, the global bank levy has gotten public support and US President Barack Obama stated that they are looking in to imposing a tax on the banks for the responsibility of the global crises on America banks last month.

  Last year, Mr. Brown had suggested a ‘Tobin Tax’ on bank dealings. As Tobin tax’s basis premise was consent of global world all over the country, it was considered to be impossible to use the theory in the real world. But, as the IMF was seeking several different ways to impose a tax on dealings among banks, an endorsement on bank levies seems possible at the upcoming April meeting in Washington. According to Mr. Brown, the bank levy imposed by the IMF will carry different aspects compared to US president Barack Obama’s way. In particular, imposing a tax on bank profit, turnover and wage rises. Britain asserts that bank levy should be used as source of tax revenue in each country. G20 countries are skeptical towards the idea that their enormous common fund could be used as savings for large banks in financial crises.

  There have been many discussions about how to manage post-crisis financial markets. Volcker’s rule and global bank tax are also part of the discussions and further discussions are needed.

By Han Joo Yeon (joo1990@ymail.com)

Weekly e-Briefing 7. Korea’s AML/CFT Policy Direction

Korea’s AML/CFT Policy Direction

 Today no country is free from the threats of money laundering and terrorist financing. Countries with weak or inefficient countermeasures attract illicit funds into their financial systems and provide platform for such criminals and terrorists. In order to protect integrity of the Korean financial system, after liberalization of foreign exchange transactions, Korean government has established the Korea Financial Intelligence Unit (KoFIU) in 2001 within the Financial Services Commission to stand against terrorism and to take effective measures against all of money laundering. Recently KoFIU has been admitted to the Financial Action Task Force, the leading international organization for anti-money-laundering and counter-financing of terrorism.

Last week, at the  FATF Plenary held in Abu Dhabi,  there was reporting on how Korea has been implementing its Action Plan since it became a member of the FATF in October last year.  And, for low-risk financial transactions, it is expected  to see deregulation in anti-money laundering rules as to allow more accessibility to financial services for those at the poverty level. Also, the FSAP, which stands for the Financial Sector Assessment Program run by IMF and IBRD, is planning to include the FATF anti-money laundering standards as part of its essential components. 

Internationally, Korea is playing an increasing role in global efforts to prevent money laundering and terrorist financing, and ultimately, to promote the concept of integrity within the financial market. As the chair of the G-20 Summit this Fall in Seoul, Korea is committed to playing a constructive role in ensuring a high-level of compliance among all nations with the global requirement for elevated financial transparency.     Please visit http://www.fsc.go.kr/eng/index.jsp for more details.