Stronger Financial Supervision

Panel calls for enhancement of financial supervisory systems to reduce damage from subprime mortgage loan

Chairman Ben Bernanke of Federal Reserve Board made a statement on subprime mortgage loans on Aug. 23 and the Asian stock market rebounded strongly following the statement just like any other stock markets in the world as if nothing happened during the past several weeks.
But the impact from the subprime and yen carry loan problems was so great that it is so hard to measure the extent of damage done to the Asian financial market.
A local business newspaper conducted a discussion on the problems in which Professor Barry Eichengreen of University of California at Berkley and Professor Paul de Grauer of Louvain University in Belgium took part as invited guests, along with Chung Duk-koo, Chairman of the Northeast Asia Research Foundation and former Commerce, Industry and Energy Minister.
On who should be held responsible for the crisis, Chairman Chung said the financial authorities should take a large part of the blame because they didn't tell the financial industry the nature of the crisis until it broke as they did in 1997. He said the U.S. financial watch dog agencies failed to issue a warning before it hit the financial industry just like the Korean financial watch dog agencies in 1997 when the foreign exchange crisis hit the country.
Professor de Grauer concurred, saying that financial monitoring agencies both in the U.S. and Britain failed to conduct a thorough monitoring of their financial industries. They said nothing will happen to the industry, but the risk spread, showing that they were wrong, he said.
Professor Eichengreen also agreed with them and said the financial authorities did nothing to banks making investment in risky assets and proper amount of capital they should have had at the time of the breakout of the subprime loan crisis. According to models the banks have, the crisis like that won't happen in 10,000 years, but it hit the industry in every five years actually. But what matters is short-term loans held by banks and this should be solved to avoid the same crisis in the future.
On the possible damage to banks, Professor Eichengreen said it is hard to pint point which bank will get hurt the most, but one sure thing is the banking system and the bond market make up the financial market. Korea needs to import advanced financial technologies such as hedge funds and CDOs as the subprime mortgage crisis showed.
Chairman Chung said Korea's financial market has achieved a structural development in the past 10 to 15 years, but it is rather like a "undone egg."The financial supervisory authorities should have an infrastructure good enough to closely monitor the financial market so that if a crisis looms, they can warn the financial market long before the crisis develops.
Professor Eichengreen asked if the financial authorities would be able to closely monitor the financial market since the market changes so fast. He said he is a little different with the idea for stronger regulations for hedge funds because a fund may be small, but they can impact the market a great deal bunched up together.
Grauer said he agrees with the idea that supervisory authorities failed to monitor banking activities closely and what they have to now is to cover the hole through which banks provide a lot of loan to hedge funds because banks could lose lots of money if hedge funds go belly-up. The link between these financial institutions should be broken up as soon as possible.
Eichengreen said funds or private equity funds will continue to exist so long as there are investors who want to make high profits.
Chung said it is necessary for investors to understand what risks mean and change their investment manners. In China, even farmers rush to stock markets when they should study about investing in securities first.
On strength of U.S. dollars, Eichengreen said many investors will switch to currencies other than U.S. dollars such as Euro if the weak dollar continues, although it is remarkable that the U.S. dollar continued to maintain its strength during the subprime mortgage crisis.
Grauer said it is hard to predict the strength of a currency but we can safely assume that both optimism and pessimism about the strengths of U.S. dollar and the Euro will co-exist for the next two to four years. nw

Chairman Chung Duk-koo of the Northeast Asia Research Institute.