Debate Rages Over Giving Central Bank More Power

▽ Revamping the financial system

Before the Financial Supervisory Service was created in 1999, the Bank of Korea had yielded a great deal of influence on commercial banks and branches of foreign banks via the Bank Inspection Board. The central bank’s power over the market has significantly decreased, however, since the board was merged with supervisory boards for insurance and securities to create the Financial Supervisory Service after the 1998 Asian currency crisis.

Since the unprecedented financial crisis now is highlighting the role of central banks, voices are rising that the Bank of Korea should get bigger authority. Last year, central banks worldwide including the U.S. Fed and the Bank of England injected a large amount of liquidity into the market since they were allowed to issue bonds.

On the other hand, the Bank of Korea struggled to stabilize prices since it has jurisdiction over monetary and credit policies. Under operating laws, the central bank can provide credit to financial institutions and for-profit companies. Nevertheless, its loan business is strictly regulated since it can engage in the loan business only in case of serious emergency threatening stability of the national currency and finance (Article 65) or the domestic currency and credit markets seriously contract (Article 80).

The parliamentary committee on strategy and finance plans to lift those regulations and allow the central bank to decide how much and where to inject money.

A committee member said, “The central bank plans to invest 10 trillion won (7.3 billion U.S. dollars) into the bank recapitalization fund but has no information on commercial banks. The bank should have both the responsibility and authority to proactively deal with the financial crisis.”

The committee plans to revamp the domestic financial system after giving more power to the central bank. At the same time, it will revise the National Government Organization Act to put government agencies in charge of financial policies including Korea Deposit Insurance Corp., Korea Credit Guarantee Fund, KIBO Technology Fund and Korea Housing Finance Corp., which have been under the Financial Services Commission, under the Strategy and Finance Ministry.

Committee chairman Suh Byung-soo said, “We’ll discuss how to rearrange the duties of the Financial Services Commission, whether to reintegrate government agencies in charge of international and domestic finance, and how to reshuffle offices in charge of financial policies including Korea Deposit Insurance Corp. The revision of the Bank of Korea Act will stir discussion over reform of the domestic financial system.”

▽ Unwilling government

The ministry and the commission agreed on the fundamental ideas of expanding the role of the central bank at an unofficial meeting hosted by the committee Monday. They oppose such a move suggested by the National Assembly, however, for fear of losing part of their power.

The commission and the Financial Supervisory Service are against the idea of giving the central bank the exclusive authority to research and reshuffle finance watchdogs, saying the issues are not urgent when considering the priority of policies.

Ruling Grand National Party lawmaker Kim Song-sik, a member of the committee, said, “The government agrees that the central bank needs stronger measures to stabilize the financial sector, but Korea needs a supervising organization overseeing the overall financial market, and the government and the central bank should share information.”

“The National Assembly has taken the initiative in relevant discussion to prevent the government and the central bank from fighting over bigger authority.”

The commission still opposes the move, however, saying, “The Bank of Korea can play the role of stabilizing the financial market without revision of relevant laws.”

Reaching a consensus will be tough since financial institutions could face a heavier burden if the central bank is given exclusive authority to research since they have been supervised by the Financial Supervisory Service and the Board of Audit and Inspection.

koh@donga.com cha@donga.com