"The Bank of Korea Must Actively Participate in Formulating Macroprudential Policies"

Joint Policy Symposium by Bank of Korea and Financial Society Held
Shin Gwan-ho "Continuous Monitoring Role of Financial Institutions Also Needed"

[Image source=Yonhap News]

There has been a claim that the Bank of Korea should not only actively participate in the formulation of macroprudential policies but also have the authority to continuously monitor financial institutions in order to effectively carry out policies for both monetary policy and financial stability.

Professor Shin Gwan-ho of Korea University stated this at the "Strengthening the Financial Stability Function of Central Banks" policy symposium hosted by the Bank of Korea and the Korean Finance Association, held on the 5th at the Bank of Korea annex 2nd floor conference hall in Seoul.

Professor Shin explained that despite the increased importance of the central bank's role in financial stability since the global financial crisis, the role of the Bank of Korea remains limited.

He analyzed, "Although the Bank of Korea Act was amended in 2011 to include financial stability in the Bank's objectives, the Bank's participation in policy implementation for financial stability has been limited. As a result, it has become difficult to operate monetary policy and financial stability policy harmoniously, increasing concerns about conflicts between the two."

While the Bank of Korea also monitors financial stability, macroprudential policies to ensure soundness, such as loan-to-value ratio (LTV) or debt service ratio (DSR), are entirely handled by financial authorities.

Professor Shin emphasized, "In principle, preemptive responses to financial instability should prioritize macroprudential policies, and there is a need to explore ways for the Bank of Korea to actively participate in the formulation of macroprudential policies."

In July, when financial market instability increased due to the Saemaeul Geumgo incident, the Bank of Korea announced a post-facto loan system reform plan that included loan receivables in eligible collateral loans alongside local government bonds, high-quality corporate bonds, and other public institution bonds. However, Professor Shin pointed out that this also has limitations.

He said, "There have been efforts to supplement and strengthen the traditional lender of last resort function that the Bank of Korea can use for post-facto financial stability. When performing the lender of last resort function targeting individual financial institutions, democratic legitimacy is necessary; otherwise, political criticism and pressure may arise."

He further explained, "Since losses incurred after performing the lender of last resort function must be covered by taxpayers' money, liquidity support should only be provided to financial institutions facing temporary liquidity problems."

However, Professor Shin added, "In reality, it is difficult to distinguish between temporary liquidity problems and solvency issues, so the Bank of Korea needs to have a role in continuously monitoring the target financial institutions."

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