Keynote Address

 

13:00~15:00

May 9 (Thu) 2013

 

Grand Ballroom (1F)

The Westin Chosun Seoul

 

  

 

 

Shin Je-Yoon

Chairman

Financial Services Commission

 

 

 

 

 

I. Introduction

  

Good afternoon, Welcome to Seoul.

 

I want to thank the Institute of International Finance (IIF) and KB Financial Group for organizing this wonderful event.

 

My special thanks go to President 팀 아담스 (Timothy Adams) of the IIF, and Chairman 어윤대 of KB Financial Group.

I am happy to see many familiar faces. ( )

In 2008, I attended an IIF meeting in line with the IMF/WB Annual Meetings in Wshington D.C.

I still remember vividly—

the members seriously discussed the deleveraging storm in the capital market, right after the Lehman collapse.

I strongly asserted the currency swap arrangements between advanced and emerging economies.

Finally, it was made.

The global community joined in action at the time.

It weathered the crisis through mutual understanding and cooperation.

Ladies and gentlemen, However, the spirit of cooperation is fading.

National interests continue to prevail.

Meanwhile, the crisis is ongoing.

The IMF has warned that it can turn chronic.

This calls for:

a reaffirmation of shared understanding;

and a stronger financial cooperation.

Today, I will talk about three topics.

 

Number one: Why do crises occur?

Number two: How we should respond?

Number three: What tasks lie ahead?

 

 

II. The Causes

 

Distinguished guests,

First topic: Why do crises happen?

The history of market bubbles and crashes is as long as the history of capitalism.

There were bubbles and crashes in the 17th century.

For example: the Tulip mania.

And in the last century alone, dozens of financial crises occurred.

Specific causes of the crises may differ.

But, the causes of recurring crises are always the same.

It is that, the lessons are forgotten too easily.

The trigger of the 1997 Asian crisis was the collapse of the Thai baht.

Asia suffered from sudden capital outflows.

When the global crisis hit in 2008, Asia experienced capital reversal again—

even though its economic fundamentals were relatively sound.

There is a common denominator.

That is, the “original sin” of not having its own settlement currency.

 

Most Asian economies are small open economies.

So they have to borrow foreign currency for trade & investment.

Especially when there is ample global liquidity, their foreign currency debt creases.

This makes them more vulnerable to external and internal risks.

 

Sudden capital outflows lead to the burst of economic bubbles―

causing panic.

 

This will impact the real economy.

In turn, this will exacerbate capital outflows.

A vicious cycle will take place.

 

 

III. The Response

  

That brings me to the second topic:

Then, How we should respond?

Distinguished guests, My 30-year career in the public service

was a constant battle with crises.

 

I had to face―

the 1997 Asian crisis, the 2003 credit card bubble in Korea, the 2008 global crisis,

and the recent European fiscal crisis.

 

I want to share the lessons from my experience.

The first lesson is about key economic & financial indicators.

Key indicators should be:

1) carefully monitored;

2) properly interpreted; and

3) aligned with global standards.

Let me say the five key indicators.

 

Foreign currency reserves;

short-term foreign debt ratio;

loan-to-deposit ratio;

current account balance; and public debt (to GDP ratio).

These key indicators need to be closely monitored.

But the work should not stop there.

The next important thing is to see what lies behind the indicators―

and actively communicate with the market.

 

One example.

In the mid-2000s, three of our five key indicators were strong.

But the remaining two―

short-term foreign debt ratio and loan-to-deposit ratio, were causing concerns in the market.

Market participants were concerned of a rise in foreign currency settlement risk.

However, external debt mostly came from foreign currency risk-hedging activities of

Korea’s exporters―especially shipbuilders.

This is what happened.

Shipbuilders sold expected dollar receipts forward to banks.

Then, banks borrowed dollars abroad to hedge their own currency exposure.

This means, bankers always want to square their positions.

This resulted in short-term external debt.

The build-up of external debt does not always indicate a greater credit risk.

I worked hard to convey this message to the market—without much success.

At the time, market participant were also worried about the high ratio of loan-to-deposits.

In Korea, CDs are very similar to deposits in terms of their nature and stability.

They are rarely circulated in the market.

But they were excluded from the loan-to-deposit ratio.

I tried hard to convince the market that CDs should be included.

But the effort did not succeed.

As a result, the market received a distorted message.

Looking back, it was crucial to communicate with the market on what the indicators really convey—

not just during crisis times but during normal times.

Another important thing:

key indicators should meet international standards.

Some countries are not doing this, due to reasons—like the lack of data or the difficulty of collecting data.

This is not a problem during normal times.

But in crisis times, the indicators have greater impact on how the market perceives the situation.

Then, the market could question the credibility of the indicators.

This will hamper the communication between the government and the market.

Meeting global standards may not be easy—

but it will prove its worth when crisis hits.

Let me move on to the second lesson.

It is also important to establish a multi-layer of defense.

Financial companies play an important role in preventing a crisis.

However, from my experience, their efforts are not enough.

Defense lines are needed.

The first line of defense is national—

it is securing enough foreign reserves.

Central banks and finance ministries should remain keen on the level of foreign reserves.

The second & third lines of defense are regional & global financial safety nets.

I will elaborate on this a little later.

Crisis contagion knows no geographical limits.

Take Mexico’s tequila crisis, for example.

It led to crises in Argentina, Brazil, and other neighboring economies.

Efforts at the national level are not enough to guard against external shocks.

So it is important to set up regional & global financial safety nets, to contain spillovers.

I learned this the hard way.

The 1997 crisis taught me the importance of regional safety nets.

To this end, Korea initiated the Chiang Mai Initiative in the early 2000s.

The CMI was developed into the CMIM.

The 2008 crisis highlighted the need for global safety nets.

So in 2010, as the chair of the G20 Finance Deputies' Meeting,

I led discussions on ways to strengthen global safety nets in concert with the IMF.

 

 

IV. The Tasks

 

 My final topic:

What tasks lie ahead?

Ladies and gentlemen,

 

There is an old Korean saying, “If united we stand, if divided we fall.”

 

Asian economies should join hands and take lead in containing systemic risks

at the regional & global levels.

 

Cooperation of Asian economies is the key to regional financial stability and growth.

 

And it should be focused on three tasks.

 

The first task:

strengthening regional safety nets

 

There were encouraging achievements.

 

The Chiang Mai Initiative Multilaterlization (CMIM)

was doubled to $240 billion in 2012, from $120 billion in 2010.

The CMIM Precautionary Line (CMIM-PL) was introduced in 2012.

The program provides liquidity

even for countries that have relatively strong economic fundamentals.

The program took regional cooperation to the next level.

 

Now, Asian countries should continue to increase the size of

the CMIM-related programs.

The existing programs should be complemented and improved.

The CMIM should actively function as the regional safety net.

We could explore the idea of developing the CMIM into a regional monetary fund.

The second task:

integrating regional capital markets

Regional safety nets, like the CMIM, are extremely important.

However, they are basically ex-post approaches.

 

We need to define ex-ante approaches to prevent financial crises.

Asian markets are still small.

"Transactions within the region" remain low.

So the markets are highly dependant on "transactions with other regions."

Integration of capital markets mean—

relying more on transactions within Asia.

This way, Asia will be able to mitigate external shocks from transactions with other regions.

Also within the region, surplus capital in one market will be channeled to another.

This will result in shared growth.

Asian countries already took steps toward an integrated capital market.

The initial step was in the bond market.

Since 2002, the ASEAN+3 member countries worked to create a regional bond market.

This is the Asian Bond Market Initiative (ABMI).

The Credit Guarantee and Investment Facility (CGIF) was established.

The ASEAN+3 Bond Market Forum was launched.

The ASEAN+3 member countries are discussing the options of creating a regional settlement intermediary and a regional credit rating agency.

A regional settlement intermediary will function as a regional clearing house and a common settlement platform.

It will facilitate cross-border bond transactions within the region.

A regional credit rating agency will provide  ratings for local currency-denominated bond with better frequency and coverage.

 

But more efforts are needed.Integration should also be pursued

among securities and fund markets.

There are many ideas on the table.

I look forward to seeing active discussions.

The third task:

coordinating regulation & supervision

Too often, the need to coordinate financial regulation & supervision is overlooked.

Today, financial crises spill over national boundaries—at a rapid speed.

This is undermining policy effectiveness at the national level.

Therefore, at the regional level, we need to set up a framework for coordinating financial regulation & supervision.

This will also accelerate the integration

among regional capital markets.

One idea!

A joint regional committee of financial regulators.

 

The job of the committee would be:

1) examining countries’ regulations & market practices;

2) formulating regional regulatory standards and resolution system for financial matters.

 

 

V. Conclusion

  

Distinguished guests,

 

An African saying goes:

“If you want to go fast, go alone.

But if you want to go far, go together.”

 

Asia’s financial integration is far from complete.

 

It will take some time.

 

Asian countries must keep pursuing  mutual understanding & cooperation.

 

The Korean government is fully committed to regional market integration.

 

It is also reaching out to emerging markets by sharing Korea’s experience.

 

Korea will spare no effort in promoting financial stability and shared growth―especially in Asia.

I am sure this Summit will give us a chance to revisit the importance of regional cooperation.

 

Thank you.