[Editorial] U.S. Crisis Shouldn’t Stop Financial Reform

Financial Services Commission Chairman Jun Kwang-woo said yesterday, “Deregulation will allow the financial sector to strengthen competition and autonomy. Privatization of state-owned financial companies will also be pushed forward as scheduled.” Faced with complaints to tighten government rules on the financial sector in the wake of the Wall Street crisis, he ruled out a change in the government’s policy of improving financial sector competitiveness through deregulation. His comments seem to imply that the government provided market participants with judgment criteria for the financial market.

The U.S. financial crisis, which has triggered huge turmoil in the global economy, has taught the lesson that raising profit by acquiring state-of-the-art financial techniques isn’t everything. The collapse of major global investment banks prove that being blinded by immediate profits at the cost of managing internal transparency and soundness can pose a threat not just to individual companies, but also the market’s very existence. Given the nature of financial business involving huge investment funds, financial screening efforts should be further strengthened as the market grows bigger.

Korea’s main opposition Democratic Party and civic groups are urging the government to use the U.S. financial crisis as an opportunity to reexamine the U.S. financial model and beef up regulations. Kim Hyo-suk, the director of the Democratic Policy Research Center, a party think tank, has demanded a comprehensive review of financial advancement policies including the privatization of Korea Development Bank; making Korea a financial hub; separation of financial and industrial capital; and the ceiling on equity investment.

Strengthening the financial soundness of companies and deregulating the industry does not necessarily conflicting with each other. The question is that the functions of deregulation should be maximized while the risks of market disturbances should be removed through strict monitoring and punishment. The argument for stricter regulation sounds suspicious in that the goal could be protection of vested interests by preventing privatization of the public sector. It could also lead to calls for government intervention in the financial sector.

The financial industry is a major growth engine producing high value-added products and creating quality jobs. The Korean financial sector has lagged behind those of advanced economies not because it lacks government supervision but because it has been riddled with excessive regulation and intervention, leaving no room for financial companies to independently pursue their profit model. To shore up the weakness of our financial system, the government should more speed up deregulation of the sector.