Seoul Embraces Financial Globalization
May 05, 2011
Financial globalization is the result of the liberalizing wave that has hit the world since the late 1970s. Korea's leaders know this, and have determined that the country will not be left behind as financial markets on every continent integrate into one that is global and knows no borders. We've put in place a credible program that is bringing the country up to international standards. In its rapid drive for development in the 1960s and 1970s, the Korean government intervened heavily in the financial sector to induce it to serve the country's industrialization. This policy achieved considerable success in the early stages of economic development, but as the size of the economy grew larger and its structure more complicated, it became increasingly clear that financial resources were not being allocated in the most effective way. Moreover, the nation's banks and other financial institutions were lagging behind both their counterparts abroad and the dynamic companies that had sprung up in the real sector of the economy. Recognizing the need to correct these problems, Korea embarked on a program of financial liberalization in the 1980s. However, the measures taken then were piecemeal and lacked overall vision. Macroeconomic instability and the fragility of financial institutions were also obstacles to financial liberalization. It's really been only in this decade, especially after the current administration took office in February 1993, that a concerted drive for financial reform began. In June 1993, a comprehensive program of financial liberalization was unveiled, covering foreign-exchange and capital-account liberalization, and interest-rate deregulation. Progress has been rapid. Interest-rate deregulation is now almost complete. Apart from rates on demand deposits, which make up only one-fifth of all deposits, deposit and lending rates have been deregulated. The stock market has been opened to foreign investors by successive increments and the current 18% ceiling on their holdings per company will shortly be raised to 20%. The bond market is also being opened stage by stage. Korea intends to accelerate the opening of the bond market as the gap between Korean interest rates and those prevailing internationally narrows. In addition, regulations that hampered the development of the foreign-exchange market have been virtually scrapped, and the Korean won's value is determined in the market under what is progressively becoming a freely floating exchange-rate regime. The exchange-rate band right now is set to a floor and ceiling of 2.25% of the previous day's rate. All of these measures effectively demonstrate Korea's will to bring its domestic financial markets in accord with the norms and standards prevailing in international markets. Financial globalization is expected to contribute to the development of the world economy through a more efficient allocation of financial resources. Especially in the case of industrializing countries, including Korea, it is helping to strengthen the competitiveness of the financial industry by giving it fresh impetus. Additionally, companies that have hitherto raised funds relatively expensively in domestic markets will gain improved access to cheaper sources of funds world-wide. However, the difficulties that a country may encounter while getting its system ready for globalization should not be neglected, as the process can increase instability in the system. The increase in cross-border transactions and settlements causes a much greater exposure to systemic risk. Even a failure by a small bank in one country can quickly affect other financial institutions around the world. The expansion of derivatives transactions has also become another factor increasing the potential instability of the international financial system. Although financial globalization provides potential opportunities for individual financial institutions to enhance profitability, there is a flip side: fiercer competition. In particular, institutions in developing countries, including Korea, have to compete head-on with their developed country counterparts, which possess highly sophisticated financial techniques, ample funds, and networks of numerous branches. From the standpoint of the monetary authorities, financial globalization has disturbing implications for the effective conduct of monetary policy. The widening of capital market opening often triggers massive inflows of funds, primarily in the form of short-term capital, which is liable to flood out again at the slightest sign of impending weakness. And the linkages between monetary policy variables--monetary aggregates, interest rates and the exchange rate--grow much closer. Thus, liberalization makes the conduct of an autonomous national monetary policy extremely difficult, and it frequently generates unwarranted exchange rate fluctuations and monetary expansion. In order to maintain macroeconomic stability, which is the prime target of monetary policy in Korea and the precondition for the success of financial reform, the Bank of Korea has been doing its utmost to keep the money supply at an appropriate level. In addition, it is attempting to promote free and fair competition in the financial sector by ensuring that market principles become firmly entrenched. Financial deregulation and globalization require the monetary authority to step up its efforts to maintain the systemic health of the financial industry as well as the sound management of individual institutions. The Bank of Korea is augmenting its prudential supervision, e.g. by introducing real-time monitoring systems, and impressing upon financial institutions the need to maintain capital adequacy and to reinforce their risk-management systems. Domestic financial institutions, for their part, are making efforts to survive and flourish in the new environment created by financial globalization. They are restructuring their organizations to improve managerial efficiency, trimming excess manpower and identifying niches. It should be noted, however, that they still face a number of challenging tasks. Above all, financial institutions need to make active use of advanced and sophisticated risk-management skills to protect the value of their assets from the various risks to which they are exposed. What is more, they ought to strengthen their credit-analysis function to prevent the incidence of bad loans and to enhance the soundness of their assets. In spite of all the difficulties and challenges posed by financial globalization, there is no viable option for Korea but to press ahead with financial reforms and globalization. Globalization is the path that we have adopted by choice as likely to bring the maximum benefits in terms of social and economic welfare. Considering Korea's expected membership of the Organization for Economic Cooperation and Development, we intend to maintain the pace at which we move forward along that path. Mr. Leeanna is governor of the Bank of Korea, South Korea's central bank.
VastPress 2011 Vastopolis
