Friday, January 20, 2012

Interview: Mr. Kwon Hyouk-se, Governor, Financial Supervisory Service

The Financial Supervisory Service was established on January 2, 1999, under the Act on the Establishment of Financial Supervisory Organizations by bringing together four supervisory bodies-Banking Supervisory Authority, Securities Supervisory Board, Insurance Supervisory Board, and Non-bank Supervisory Authority-into a single supervisory organization. The primary function of the FSS is examination and supervision of financial institutions but can extend to other oversight and enforcement functions as charged by the Financial Services Commission (the former Financial Supervisory Commission) and the Securities and Futures Commission. In an exclusive interview, Mr. Kwon Hyouk-se, Governor, FSS, speaks about his priorities, touching on many topics that are in the news.
Uncertainties in the global financial market continue due to the eurozone financial crisis. Can you briefly evaluate the Korean economy and financial market? The uncertainty emanating from the euro-zone debt crisis clearly has had a broadly dampening effect on global market outlook. To date, however, the overall extent of the impact of the debt crisis on the Korean economy and financial markets appears not as grave as initially feared. Korea’s exports continue to grow at a fairly steady pace, and the general expectation is that the economy will maintain growth momentum with improving employment and trade surplus. Looking ahead, a continued slowdown in the developed countries will likely mean slower export growth. Korea’s exports, however, are less dependent on these markets than in the past, so the overall growth trajectory should remain intact. In the financial markets, stock prices and exchange rates did fluctuate more than usual as was the case in other markets, but they are now settling down to more normal levels. I would also stress that the overall soundness indicators of financial institutions remain firm. Speaking more broadly, the declining proportion of short-term external borrowings in the banking sector and the sizable foreign currency reserve, currently in excess of USD300 billion, should leave no doubt about the strength of our foreign currency liquidity conditions. The introduction of hedges funds is seen by many as an innovative development if the Korean financial markets and acknowledge their economic utility, however detractors have also pointed out their risks. What are the measures to be implemented in order to minimize their potential side effect? Do you have plans to improve laws and regulations for the stable growth of the industry? Regulators imposed a 400% cap on leverage and derivatives trading of hedge funds against their assets as a way to minimize potential side effect. There are other similar checks and safeguards on hedge fund risk exposure, counter-party risk, and liquidity risk. Unlike global hedge funds, local hedge funds will start out as regulated entities. As the new funds take hold in the local investment market and become more established, there will be opportunities to take stock of where the market stands and whether more accommodating regulations are warranted. Most financial institutions in Korea have active Corporate Social Responsibility programs as they know they owe society and Korea a debt of gratitude. Do you think enough is being done? The spread of the anti-Wall Street protests in the U.S. and elsewhere is one manifestation of the general public’s desire for greater accountability and more socially responsible business conduct from the financial industry. In Korea, we do see financial institutions reducing their service fees and giving more to public causes to do their part as responsible corporate citizens. The general reception from ordinary citizens, however, seems be that the financial industry can and should do more, especially in doing away with arbitrary or heavy-handed industry-wide customs and practices that harm consumers. Less credit bias against the socially disadvantaged and low-income borrowers would also help. Since you took office, you have continuously emphasized the need for prudential supervision and financial consumer protection. Why? In the wake of the 2008 global financial crisis, financial consumer protection has emerged as a major policy priority worldwide. We see this in the common principles on consumer protection in the field of financial services that the OECD developed for all financial service sectors. As I alluded to earlier, the anti-Wall Street protests is just one of the growing calls on many fronts for better, more proportionate checks and balances on financial institutions for consumer protection as well. What financial institutions can draw from these developments is that consumer protection matters, matters enormously and that they should engage in an earnest effort to integrate consumer protection into their overall risk management from a long-term strategic perspective. Can you give us an evaluation of the progress made for financial consumer protection? What are the future directions? Because several mutual savings banks were on the verge of collapse when I took office, my early priority was to restore the public’s trust in financial institutions and to reinforce consumer protection. This led to the revamping of our organizational structure and the realignment of our supervision and enforcement focus to consumer protection so that we can better deal with anti-consumer practices. We have also expanded programs to improve consumer finance literacy and education. This year, we are going to take an aggressive stance on consumer protection as a key objective and commit ourselves to implementing the OECD principles on financial consumer protection. Under the KorEU FTA, both parties are expected to allow offshore data processing within 2 years from 1.7.2011 and additionally the FTA also calls for increased flexibility in allowing delegation of more back office function to onshore affiliates and offshore affiliates. The latter will require a change in business delegation regulations and licensing guidelines. What is the FSS’ position on this? The free trade agreements with the EU and the U.S. provide for offshore data processing for foreign financial institutions with some restrictions. For instance, restrictions may apply for certain types of customer data such as sensitive personal data in need of special care and protection and data deemed necessary for supervision purposes. It was also agreed that the implementation of offshore data processing would be suspended for two years when the agreements take effect to give time for fine-tuning of the supervisory processes and additional safeguards needed for handling of private information and preventing data breach. Following the ratification of the Korea-EU FTA by the National Assembly in July 2011, a task force comprising representatives from the Financial Services Commission and legal consultants has been working on a detailed implementation plan. The expectation is that the level of financial data to be allowed for offshore processing would be determined with an extensive review of private information protection policies at home and elsewhere and case studies of financial data protection and offshore data processing facilities in other jurisdictions. The FSS has recently urged banks to restrict the dividend pay-out ratio in order to further strengthen capital basis. In the cases of foreign banks (branches and subsidiaries) with only one shareholder, shouldn’t the FSS allow a little more flexibility in dividend pay-outs considering that the parent companies stand ready to inject capital as and when needed? The FSS is not contemplating any blank restriction on bank dividend pay-out practices, domestic or foreign. But there should be no argument about unjustifiably outsized dividend pay-outs that undermine the essential capacity to absorb losses or threaten the long-term capital soundness. Asset soundness and financial market conditions may deteriorate unexpectedly, and U.S. and European bank regulators nowadays keep a close eye on bank dividend plans and capital levels under various stress scenarios. This is a prudent step, and it makes sense for banks to set aside more when they can to strengthen their capital positions. In 2011, Korea’s financial market and FSS were marked by many big or small events. Can you tell us what was the most rewarding and memorable work progress this year? Regulators sought to keep financial markets calm and orderly by expediting resolution of the insolvent mutual savings banks and taking timely measures aimed at household debt growth and potential spillover effects from the euro-zone debt crisis. With regards to consumer protection, we significantly increased our supervisory resources and beefed up our internal oversight structures to better focus on such consumer priorities as more rational service fee structures. We also targeted small-cap share price manipulation (the so-called “theme-driven share trading), insurance fraud, loan fraud, and voice phishing as the four key consumer protection priority and reinforced our prevention efforts. In a move broadly aimed at revitalizing organizational culture and capability, we also carried out a large-scale personnel shuffling, brought about a clearer division between supervision and examination responsibilities, and sought to expand assistance to various disadvantaged groups. Briefly could you explain to us the supervisory policy and examination directions for 2012? The priority will be on safeguarding financial markets from disruptions that may be triggered by the euro-zone debt crisis. To this end, the FSS intends to step up monitoring of capital flows and encourage domestic banks to secure more foreign currency liquidity as an additional buffer against external risks. In addition, we are going to keep a close watch on the credit conditions of small- and medium-sized enterprises as well as industries especially vulnerable in a downward economic cycle such as construction, shipbuilding, and shipping. Our supervision of household debt growth will also continue in 2012. With more low-income households expected to come under financial pressure in 2012, we will continue to take strong supervision and enforcement actions against abusive business practices and conduct by financial firms. This will include more vigorous monitoring and supervision of private money lenders and consumer credit providers that prey on low-income borrowers. In terms of examination, we will be looking to improve the professional competence and efficacy of our safety and soundness examination. This means applying examination resources and intensity proportionate to the size of financial institutions. We will also intensify the scrutiny on abusive practices that harm consumers and small businesses. Financial firms will also be held to account for non-arm’s length transactions with large shareholders.

Thursday, January 19, 2012

Interview: Mr. Bahk Jae-wan, Minister of Strategy and Finance

The Korean government, in its announcement of the official economic policy directions for 2012, has projected that the Korean economy grew by 3.8 percent in 2011 and will have a slightly lower 3.7 percent growth for 2012. The nation’s consumer inflation will drop to 3.2 percent, trade will see $16 billion in surplus, and jobs will expand by 280,000, the government further predicted. In order to act preemptively against external threats caused by a slowing global economy, the Korean government will be allowing early access to the budget for the first half next year and boosting the domestic market to stimulate the economy. Meanwhile, Europe’s debt problem and slowing global recovery are expected to hold back Korea’s export and import growth from last years 19.2 percent and 23.2 percent to 7.4 percent and 8.4 percent, each. Though growth in exports tapers off, private consumption will fill in the slack by rising from 2.5 percent last year to 3.1 percent this year. In early December 2011, Minister of Strategy and Finance, Mr. Bahk Jae-wan, announced that the government will focus on boosting the economy and stabilizing people’s livelihoods this year in order to build a ground for ‘eco-systemic development’ or shared growth. However following the the death of North Korean leader Kim Jong-il, the government has now changed its economic policy priority for 2012 to risk management and discovering new growth engines from job creation. MOSF cited the euro-zone debt crisis, and the geopolitical risks of the Korean peninsula and the Middle East crisis as the three largest risk factors that will threaten the Korean economy this year. Korea’s contingency plan initially included the euro-zone debt crisis only, but North Korea and the Middle East were added in the list. Foreign investors are all aware of the risks and are confident that the Korean government will put in place suitable policies to minimize the fallout. They believe that despite the risks, domestic businesses can turn the current difficulty into an opportunity. In the end, relative to its neighbors, Korea was able to benefit from the Asian crisis in 1997 and 1998. It is sure to happen this time too. In an interview, Minister Bahk outlines the government’s strategies for this year.
What are the risk factors to the Korean economy this year? And what are the government priorities and plans to manage them? I do believe that there are many risk factors for the year 2012. I believe that the issue closest to the EUCCK would be the European financial crisis. Secondly, Korea has a high reliance on international markets, especially the import of raw materials. Therefore the developments of the Iranian situation and its impact on the international crude oil prices will impact Korea. Internally, in Korea, for the first time in 20 years we have the presidential elections and the general elections being held at the same time. Just like the eurozone decision, we may find that it is very difficult to make timely decisions. Decision making may be delayed, which will create more risk factors. Concerning the European financial crisis, as you are well aware the maturity for the Italian sovereign bond is between February and April and until June many EU banks will be securing their core capital rates which may lead to de-leveraging, which may impact trade finance for Korean companies, leading to instability. However, as you are aware, within the European zone there is to be the EU summit in the end of January. And at the end of February we will expect to be holding the G20 financial ministers meeting. There is also the agreement between the heads of Germany and France. As the crisis escalates, we look forward to a faster decision making process. And therefore our expectation is that we will be able to find the key to the solutions within the first quarter of this year. We do believe that we are considering the possibility of the impact of the European financial crisis on the Korean financial market. We have contingency plans in place and we are responding according to our plans. For example, there was the issuance of bonds by EXIM bank of $2.5 billion and there was a booking of over $9 billion. We do believe that our foreign reserves is adequate and we also have various plans for worst case scenarios. Concerning the developments of the Iranian situation. I don’t believe it is within our control. However we are coming up with various measures to mitigate the impact of the development . The reminder of the issues are diplomatic issues and I am not in a position to reveal the details. Concerning the two major elections to be held this year, unlike the EU, we do not have a system centered around the parliament. And it is centered around the president. Therefore the traditional bureaucracy within our government bodies including the ministry of finance are quite patriotic in our work, and traditionally we believe that these patriotic status of our bureaucrats impact the decision making of the state and therefore I do not think there is too much to worry about the contingencies following the 2 elections. As we rely on our mature media in Korea and our opinion leaders in Korea we will make sure that we keep a balance against populism. And difficulties in decision making as well as confusion in government policies. I have very optimistic views for this year. Over the last couple of years, the foreign exchange rate has been very volatile. Is the government planning to implement measures for making them more stable? The volatility of the exchange rate has been there since 2008, and it now reducing. It was 0.94 in 2008 which reduced to 0.48 percent last year. This is better than the European figures of 0.57 percent. As you are well aware the later half of last year saw a high degree of volatility in international markets and I do believe that in Korea it was relatively stable. Today I saw that there was a trend of depreciation in the morning but we do believe that any extreme change in any one direction is not ideal, therefore ewe will work to mitigate the volatility of our exchange rates What the government is considering is that our foreign exchange market is quite small at the moment and so we will work on adding depth and width to our market. As for capital market we will provide incentives to encourage long term investments we will continue to enhance the size of our capital market so that it will be able to absorb any shocks in the future. Concerning the inflow and outflow of capital, we believe that any rapid change is not ideal and we are therefore looking at ways to that is why we we have come up with three regulations for foreign currency. We will continue to analyze the pluses and minuses of these regulations and work on any improvement as necessary. As for the bond market, many of the central banks outside Korea, are well interested in the Korean market. And they believe that the forecast is positive. so we will continue to collaborate closely with some central banks of other countries. And we will also continue to work to make sure that there is a virtuous cycle to reduce the volatilities. The biggest burden on household finances this year is expected to be the rising costs of living. What are the government's countermeasures to tackle inflation issues? First of all, I believe that the role that the government can play in controlling inflation is quite limited and the efforts should be made in a market friendly manner. Compared to advanced nations the cost of living in Korea is not high but the increase is relatively high. We believe that the rate of increase is around 1 percentage point higher than other advanced nations we do have indepth analysis concerning the reason for such rapid increase and we believe it is the hindering of competition, the insufficient opening of information and the possible bubble that this creates in the market may contribute to the increases. The attitude of the consumers themselves is also contributing to such increases. Ostentatious display has also also led to bubble. There are also many different reasons . The reason that the government cannot control is the worsening of the climate conditions which leads to changes in raw material cost. However, the reason that we can deal with such as structural reasons, the sentiments of consumers, disclosure of information or encouraging of competition..these are the issues that the government will work on from the mid to long term, there are many micro aspects to the measures that we will be working.

Thursday, January 12, 2012

Interview: Mr. Kwon Do-youp, Minister of Land, Transport and Maritime Affairs

In May 2011, Mr. Kwon Do-youp was appointed as the Minister of Land, Transport and Maritime Affairs (MLTM), prior to which, he was first vice minister in the ministry. The First form of MLTM, named as Mnistry of Transportation, was organized at the time of the establishment of the Korean government on August 15, 1948. Since then the Ministry has been renamed as Ministry of Construction and Ministry of Construction and Transportation and finally was recreated by the Government’s reorganization through merging with the Ministry of Maritime Affairs and Fisheries in 2008. Minister Kwon is an expert official on housing affairs who took the head-post of Housing Division and acted as Director General for Housing Affairs in Ministry of Construction and Transport (MCT). He has shown both professionalism and driving force in handling land and housing affairs, and that he is judged the right man to upgrade housing environments through stable supplies of houses and to find new solutions to the various housing problems particularly for low-income people. He started civil service, assuming an officer post in deliberation of New Town Development in the Ministry of Construction (MC), and held several key posts including Land Policy Div. Director General (DG), Housing Div. DG and Public Relation Division DG and assistant VM in MCT. And he finally made the first VM in MLTM. Starting his civil service in construction sector, he is deemed to have acquired deep experiences with transport as president of Korea Expressway Corp., state-run, before he was appointed the first VM of MLTM. As a major in civil engineering and public administration, he is highly praised as a leader of consilience versed in engineering and civil service. Following the earlier merger of other ministries with MLTM, he has done his excellent job as the first VM, so he was deemed as the right man to smoothly address the various pending issues including Four River Development Project, real estates and the move of civil service offices to Sejong City (starting this year). He has been displaying his best ability in sorting out MLTM’s most pressing problems of house shortage and of jumping house rental deposit on the strength of his diverse experiences of 30 years since 1979 in the fields of construction and transport. In an exclusive interview, Minister Kwon speak on his priorities and policy plans.
Could you please tell us your vision and policy directions for the future? Land and ocean have been the foundation for Korea's economic development, but in the future it needs to play a bigger role by being a quality place where a new culture can be created. For this reason, the following three qualities--the quality of land, the quality of its inhabitants, and the quality of the institutions on which the citizens and land are based--need to be harmonized. Going forward, in order to increase the competitiveness of the nation's land and ocean through region-specific development strategies, the following efforts will be made: ● Infrastructure such as road, railway, housing, water resources, and aviation, will be made more effective through expansion and rigorous maintenance, improving the landscape of the nation ● Also, new growth engines in the maritime sector will be cultivated through maritime tour promotion and marine resources development; while, ● Regulations pertinent to land will be streamlined to suit the convenience of the public, providing a more scenic and beautiful land environment to the public. Despite the recent cargo volume increases, the maritime industry is seeing revenue decreases; what are the government's measures to analyze the reasons for this and overcome this problem? The global maritime industry started experiencing a downturn from the second half of 2010 and this continued to 2011, reducing maritime fares. For instance, the BDI (Baltic Dry Index) on Nov. 3 was 1,817p, which is 42% of the five-year average; HRCI (Howe Robinson Container Index) on Nov. 2 was 556p, which is 64% of the five-year average. The cargo volumes, such as dry cargoes and containers, all increased but, the vessels are being oversupplied compared to the cargo volume, causing profitability erosion of maritime companies. The soon-to-be-delivered vessels account for 31%, in the case of container vessels and 41% in the case of dry cargo vessels, of the current number of vessels, respectively. The rapid oil price increase (36% increased year-on-year as of June, 2011) is eroding the profitability of companies by increasing their costs, as the fuel cost takes up 15-20% of the total costs for maritime companies. Due to the advanced countries' economic uncertainty stemming from the sovereign debt crisis of the US and Europe, the cargo volume increase is expected to slow down markedly going forward. As it seems difficult to overcome the maritime industry's economic woes in the short term, focusing on internal growth instead of external expansion should be more emphasized. First, industry-wide efforts, such as replacing old vessels, changing docks to benefit from lower fee offers, are essential; while, the government will closely consult with relevant agencies and review measures that can strengthen the foundation of the nation's vessel financing, such as expanding the guarantee scope of the vessel financing and extending operation of the KAMCO vessel funds. As of late October, 2011, 430 billion won of loan guarantees have been made to maritime companies. Restructuring Funds, which are the main funding resources for the KAMCO fund, will be maintained till the end of 2011 before being withdrawn. How is the Four Rivers Restoration Project progressing? In Korea, 70% of annual rainfall is concentrated in summer. As it causes frequent flood and drought, the government spends 3~4 trillion won every year for the recovery from flooding damages. Recent climate change is expected to cause more frequent flood and drought. In addition, investment in rivers is urgently needed as high level of economic development raised awareness about the importance of rivers and demand for using rivers and water-front areas. In the past, riverfront areas were used for farming or neglected. Pollutants accumulated downstream in waterfront farmlands and insufficient fresh water during dry seasons undermined river ecosystem. In order to prevent large-scale natural disasters occurred by climate change and improve the soundness and diversity of ecosystem by securing clean and sufficient water resources, Korea carried out the four major rivers restoration project. Neglected water-front areas turned into bicycle lanes and ecology parks where people enjoy cultural and leisure activities. The four major rivers restoration project that was initiated in 2009 is now 92% completed, and the main stream project is 92% completed. Especially, the main stream project will be completed on schedule by the end of this year. During implementation of the project, there was massive criticism from environmental groups about river dredging, etc. However, as the project is bringing fruitful outcome by securing abundant water resources and building bike paths and water-front parks, many citizens now support the project. In particular, although this summer recorded an unprecedented rainfall during the rainy season, there was no serious damage in the four rivers compared to the past. The Korean government's efforts of restoring the four major rivers, responding to climate change and improving ecosystem, will be a good example to Europe. The 1,592km-long bicycle path along the four rivers is the largest and the most beautiful lane in the world and is attracting many tourists who enjoy and give a positive response to the path. What is the reason for last year's yearly housing lease fees and what is the MLTM's plan to stabilize the housing market? The increase in Jeonse prices was mainly resulted from the imbalance between demand and supply of housing for Jeonse and monthly rent. The global financial crisis in 2008 reduced housing supply was reduced since the housing construction market significantly shrank and raised controversy whether or not to abolish the housing-price-capsystem. * Annual authorization and permission for housing construction - (’05) 46.4→(’06) 47.0→(’07) 55.6→(’08) 37.1→(’09) 38.2→(’10) 38.7 Also, stabilized housing price and the increase in redevelopment·housing reconstruction and people's migration increased demand for Jeonse rather than housing sale·purchase. The Korean government will make continuous efforts to stabilize citizens' residence and housing prices. Considering the shortage of housing quantity and quality, it will supply around 400 thousand houses every year as Korea falls short of housing quantity and quality. In addition, the government is trying to diversify housing types and ease regulation in response to changes in demography and family structure due to increasing single and two-person families, low birth rate and aging population, and changes in housing market structure including increased demand for housing for monthly rent. * single, two-person family (%) : (‘90) 22.8 →(’00) 34.6→(’10) 48.1→ (’20) 57.7 * household of aged family members(%) : (‘90) 8.5→(’00) 12.1→(’10) 17.9 →(’20) 22.7 It will also develop and implement a housing policy fit for generation and social class to supply customized housing for new university graduates, middle aged and elderly people, etc. What is the role of the MLTM in carrying out the Korean government's green growth strategies? MLTM is carrying out an important mission of taking care of land, city, housing, transportation, and maritime affairs essential to life of all citizens, and is therefore in a crucial position to lead the way for greenhouse gas reduction and green growth in Korea. Thus, MLTM is pursuing a green growth policy based on the vision of "Creating Low Carbon Green Land and Ocean." At the same time, MLTM is contributing to the alleviation of climate change damages by reducing greenhouse gases, carrying out projects aimed at increasing the adaptation level against climate change, cultivating new economic growth engines such as green technologies and industries, and providing assistance to under-developed countries in the green technology field. First, in the greenhouse gas reduction category, Buildings and transportation, which take up approx. 42% of Korea's greenhouse gas emissions, are being transformed through diverse projects aimed at reducing greenhouse gas emissions, such as revision of regulations, demand volume management, and subsidies; in particular, the President's pledge to "reduce 30% of Korea's greenhouse gases compared to BAU by 2020" is being on track to be accomplished as the government set a goal of reducing 26.9% and 34.3% of greenhouse gases in buildings and transportation sectors, respectively, implementing relevant measures. Second, in the climate change adaptation category, for the purpose of reducing damages from extreme weather conditions like floods and droughts, the Four Rivers, stream maintenance, dam construction, and sea water desalination projects are being implemented, while other programs such as maritime observation network establishment, coastal region vulnerability assessment and maintenance are underway. Lastly, in order to create new growth engines based on green technologies MLTM is focusing its efforts on securing maritime energy using solar, tidal, algae, and wave power, cultivating renewable energy like maritime bio diesel, developing various architecture technologies for saving energy, and maintaining an IT-based efficient energy management system. MLTM will do its utmost to minimize life and property damage from natural disasters caused by abnormal weather conditions by making constant development of technologies and seeking global cooperation; in particular, it will actively contribute to increasing the quality of life for all humanity on earth by carrying out its green technology support projects. Any additional comments to the European FDI companies in Korea? The Korean government is developing high potential, investment-worthy future growth centers, such as Sejong City, Innovation City, Enterprise City, Saemangeum, six Free Economic Zones and Jeju Free International City. These centers will emerge as the country's economic growth drivers; investment made in the cities will bring about benefits not just to the concerned cities themselves but also to the investment companies. The government is striving to create a conducive environment for FDI companies for their investment and business activities, by providing tax benefits, subsidies, and lease fee reductions. It is hoped that these projects will draw more attention in the years ahead *************** Current FDI company assistance system overview - Cash assistance: if 20 or more staff are hired, education and training subsidies and employment subsidies are provided - Lease fee reduction: when leasing a government-owned land, the fees will be reduced by 50-100% - Tax reductions: (1) National tax (corporate tax, income tax) ▪ High tech industry assistance companies in open FDI areas: 100% for 5 years, 50% for 2 years ▪ Complex-style FDI areas: 100% for 3 years, 50% for 2 years (2) Regional tax (acquisition tax, property tax) ▪ According to relevant ordinances, up to 15 years can be applied ***************