Berkley professor warns that a different crisis will hit the world


Communication between central banks and their financial supervisory authorities is essential for financial stability, University of California, Berkley professor Barry Eichengreen said Thursday.

“I think there can be very serious problems with this kind of arrangement where one entity does the supervision, and another one the central bank does emergency lending if the two don’t communicate,” Eichengreen said, adding that the bank run experienced by the U.K.’s Northern Rock resulted from lack of communication between the central bank and the supervisory authority.

He came to Korea to attend a global conference on future of the international financial architecture organized by the Bank of Korea, which opened on Thursday in the headquarters of the central bank in downtown Seoul.

Regarding the need to strengthen central banks’ supervisory functions, Eichengreen said that he favored the Korean model of having the Financial Supervisory Service as the main regulator as banks can avoid regulations in the absence of an integrated supervisor.

Regarding the issues surrounding the establishment of a mega bank in Korea, Eichengreen said that such an entity will be beneficial but that it will also pose a risk.

“I think they will be helpful and risky. We know that large banks have advantages in terms of providing services efficiently and we also know that when they are too big to save, and too big to fail they can pose serious risks,” Eichengreen said.

“Switzerland is another case they have very big banks, they put very high capital requirements on these banks to ensure that they will be safe and not damage the economy. I think Korea can study what the Swiss have decided if they have not already.”

On the possibility of another global financial crisis, Eichengreen said that a crisis different from the 2008-2009 event will undoubtedly hit the world, saying that the restructuring of the global monetary system is far from complete.

Regarding the future of the dollar, he said that while the currency will remain the world’s most important, the world is moving to a stage where the euro and the yuan share the role of key currency.

By Choi He-suk (cheesuk@heraldcorp.com)