[Viewpoint] "Financial Principle" and "Structural Contradiction"... Supervisory Reform Is the Answer

Professor Kim Hong-beom, Department of Economics, Gyeongsang National University

"Rational differentiation of loan interest rates and limits according to the borrower's credit rating and income is a financial principle." This is the universal perspective of economists presented in the editorial dated March 29. The very next day, the president's remark that "applying high interest rates to low-credit borrowers is a structural contradiction" was reported in the media. The 'financial principle' suddenly degenerates into a 'structural contradiction.' The difference in viewpoints is as vast as heaven and earth.

The world talks about the president's 'financial misunderstanding.' That is true, but it is not the whole story. Financial bureaucrats who have handled welfare and redistribution?tasks that should be managed by fiscal policy?under the banner of 'warm finance' as microfinance, and politicians who treat finance as an inexhaustible resource. Are these people not responsible for such misunderstandings?

"Reducing the high-interest burden on low-income people, protecting financial consumers and vulnerable groups robustly, and spreading the warmth of inclusive finance" was the 2021 resolution of the Financial Consumer Bureau of the Financial Services Commission at the beginning of the year. By focusing solely on microfinance policies aimed at low-income and vulnerable groups, the supervisor’s fundamental role of consumer protection has been neglected. This is a conflict of interest. The recent failure in consumer protection supervision due to fund insolvency is no coincidence. It stems from the early 2008 decision by the Presidential Transition Committee to expand the Financial Services Commission, which was the supervisory authority, to also take charge of financial policy. Meanwhile, the political sphere is discussing various coexistence bills under names such as profit sharing and loss compensation to politically mobilize and allocate financial resources. In reality, the Financial Services Commission is taking the lead and coordinating with them.

Meanwhile, the financial order and financial principles of our society are being shaken to their roots. Legislation for 'bank debt forgiveness' is being openly promoted. Soundness supervision is being neglected, and genuine consumer protection is hard to find. This is the result of long-standing structural problems in financial supervision, such as conflicts of interest between financial policy and supervision, political subordination of supervision, and the dual supervision system where the head (Financial Services Commission) and the body (Financial Supervisory Service) are separated.

Fortunately, there is a breakthrough. Entrusting financial supervision to the Bank of Korea, which has guaranteed legal independence. This is a clear and unique solution that can decisively eliminate structural problems. Furthermore, it is extremely timely for the following reasons.

First, it aligns with recent global trends. According to a 2018 study by D. Calvo and others, the trend of 'central banks gaining substantial authority in micro- and macroprudential regulation and resolution' has become prominent after the global crisis. Moreover, to respond to green swan events such as COVID-19 and climate change, F. Restoy, head of the Financial Stability Institute at the Bank for International Settlements (BIS), diagnoses that 'the need for central banks to comprehensively manage financial stability through micro- and macroprudential supervision has increased.'

Also, the long-standing issue of choosing a supervisory model will be naturally resolved. In the 2012?13 supervisory reform debates, the main obstacle was the choice between the integrated model (a single supervisory authority overseeing all financial companies and markets) and the twin-peaks model (separate authorities for microprudential supervision and consumer protection supervision). However, if micro- and macroprudential supervision is entrusted to the Bank of Korea, further concentration of authority there would be cautious. The focus will naturally shift toward a twin-peaks structure that places the consumer protection supervisor outside the Bank of Korea.

The situation is serious. Discussions on supervisory reform to place the Bank of Korea at the center of supervision must begin immediately.

[Kim Hongbeom, Professor of Economics, Gyeongsang National University]

This content was produced with the assistance of AI translation services.