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Expert calls for tougher supervision of banks

Banking regulators across the globe need to introduce marco-prudential measures, including a bank levy, in a bid to enhance soundness of the economy and the financial system, an expert said Monday.

“New bank capital rules called BASEL III can be considered an outcome from an agreement on micro-prudential measures. But there has been not enough agreement on macro-prudential tools so as to enhance the overall financial system,” Shin Hyun-song, an economics professor at Princeton University, told a conference on macro-prudential regulations.

“Only making banks beef up their loss-absorption capacity falls short of promoting the soundness of the financial systems.”

Shin blamed banks’ excessive short-term borrowing for the cause of the global financial turmoil. Banks tend to rush to repay debt to curtail risks when a financial crisis takes place after bloating their assets during favorable times, backed by heavy borrowing from overseas.
Shin Hyun-song
Shin Hyun-song

Shin, a former senior economic adviser to President Lee Myung-bak, said there is a need to impose regulations on banks’ asset growth and borrowing in order to promote the macro-prudential soundness of the economy.

He cited regulations on mortgage loans, including the debt-to-income ratio (DTI), as part of policy tools to curb banks’ excessive lending.

Small open economies like Korea had to undergo the repetition of excessive cross-border capital flows whenever big external shocks hit, forcing them to hoard a large volume of foreign exchange reserves as “self-insurance.”

Leaders from the Group of 20 nations recognized that emerging countries could adopt macro-prudential measures to stem excessive foreign capital inflows.

As part of such efforts, Korea will introduce a bank levy that will be imposed on non-core foreign currency borrowing in the second half. The government also imposed a tougher regulation on foreign currency forward positions held by domestic banks and local branches of foreign lenders and re-introduced a tax on foreign money invested in local state bonds.

“Imposing a levy or tax on non-core liabilities could curb banks’ excessive debt growth that carries higher risks, thereby helping promote financial stability,” Shin said. (Yonhap News)