[Viewpoint] Transfer Financial Supervisory Authority to the Bank of Korea

Urgent Need for Supervisory Reform to Break Political Ties
Why the Bank of Korea Should Oversee Financial Supervision
Global Trends Support Central Bank-Led Oversight
A Governor with Expertise and Courage Is Essential

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

Over the past several years, our society has been plagued by continuous policy failures and confusion. This is due to politics, rather than expertise, consistently dominating public policy. During this time, the overall regression of the public policy system has made reforms in related fields urgently necessary. The presidential election is approaching. However, it remains disappointing. The competition between the ruling and opposition presidential candidates has focused solely on unproductive cash handouts and populist development pledges, while forward-looking mid- to long-term reform discussions have disappeared. Financial supervisory reform is one such issue.

Under the Moon Jae-in administration, finance was severely contaminated by populist politics. For example, the absurd view that "low-credit borrowers being charged high interest rates is a structural contradiction" was directly 'delivered' to financial institutions and markets through the financial supervisory authorities. As a result, high-credit borrowers suffer from reverse discrimination in interest rates (damaging financial principles), and borrowers deliberately lower their credit ratings to receive policy fund support (disrupting financial order). Meanwhile, despite the ongoing cryptocurrency frenzy, the supervisory authorities inexplicably turned a blind eye for a long time (consumer protection gap).

The political capture of supervision is due to the vulnerability of the current supervisory governance structure. First, the dual supervisory structure divided between the Financial Services Commission (a bureaucratic organization) and the Financial Supervisory Service (a private organization) is problematic. It is impossible for these two heterogeneous organizations to act as a single supervisor. Frequent turf battles and conflicts occur between the two organizations, and responsibility is unclear in emergencies. Additionally, the conflict of interest between the financial supervisory authority concentrated in the Financial Services Commission and the financial (industry) policy authority is also an issue. Financial supervision, which aims for stability, and financial policy, which aims for efficiency, often clash. These governance structural cracks caused by the dual supervisory structure and conflicts of interest have become channels through which politics permeates routine supervision.

Therefore, supervisory reform to sever ties with politics is urgent. At this juncture, I strongly propose assigning financial supervisory authority to the Bank of Korea. Doing so would fundamentally eliminate the existing supervisory cracks. Furthermore, the Bank of Korea, which has legal independence, would serve as a primary safeguard against political contamination of supervision.

That is not all. The global trend after recent crises and changed circumstances also provide another major reason to place the Bank of Korea at the center of supervision. According to the Bank for International Settlements (BIS), many central banks have recently taken on new policy responsibilities across financial supervision (including macroprudential policies for financial system stability and microprudential policies for individual institutions and market stability). The explanation from BIS economists for this phenomenon is clear: "If the instruments of one of two distinct policies affect the objectives of the other, it is better for a single authority (the central bank) to handle both policies rather than dividing them between two separate authorities." They also highlight the close coordination and complementarity realized between financial stability policies (micro- and macroprudential policies) and macroeconomic stabilization policies (monetary and fiscal policies) during countries’ COVID-19 crisis responses. Such real-world experience provides evidence supporting the validity of these arguments emphasizing complementarity among related policies.

Finally, as important as institutional reform is the human factor. The Governor of the Bank of Korea should be a person equipped not only with expertise but also with 'guts.' Someone who, prepared to step down at any time, steadfastly pursues consistent policies focused solely on the national economy regardless of political pressures?that is the kind of guts needed.