The Change and Trend of Financial Regulation in Korea - Focusing on Banking Regulation -

Abstract

Financial regulation can be referred to "an authority puts limit in certain activities and enforces compliance in order to maintain market order in trade among financial institutes, producers of financial products, and financial customers. Changes of financial regulation systems in Korea have been accelerated mainly by the foreign exchange crisis, the global financial crisis and FTA(Free Trade Agreement between Korea and Unites States of America, KORUS). Especially, ‘market regulation establishment’ and ‘competition strengthening’ suggested by the IMF bail-out program are evaluated to be an important motivation behind reinforcing sound regulations in the Korean financial law system and improving unnecessary entry regulations and the ‘Iron Wall’ in each section. The biggest momentum of changes between the foreign exchange crisis in 1998 and the recent global financial crisis was the establishment of Financial Investment Services and Capital Market Act. Now, the financial regulation system has been facing a new trend of international agreement in regulation through the re-regulation trend since the global financial crisis and FTA. In the Banking Industry, entry and liquidation are regulated through an approval to protect depositors or investors. The Banking Act contains the requirements for approval of entry and liquidation. Ownership regulation was introduced to prevent banks from becoming a ‘piggy bank’ of industrial capital and to ban interest conflicts by major shareholders and illegal profits through moral hazards according to the result of interest conflicts. Banking business under business regulation is divided into original, incidental and concurrently running parts, and each business is expanded and changed following development of financial market. Prudential regulation with Basel Capital Accord can be found in Art. 2 Para. 1 Nr. 5 of the Banking Act and Art. 1-2 of the Enforcement decree. Basel Capital Accord II was introduced to Korea in 2007. In Dec. 2010 the Basel Committee issued the Basel Capital Accord III, which presented recent global regulatory standards on bank capital adequacy and liquidity endorsed by the Seoul G20 summit in Nov. 2010. In addition to these regulation, there are interest conflict regulation and personnel regulation. Regulations through administrative guidance are preferred as one of the non-typical methods of financial regulation. Its original purpose is that a government attracts economic activities to a certain direction based on agreements of partners. However, the administrative guidance is authoritative in reality. The Financial Services Commission enacted an operational rule on administrative guidance to improve transparency of administrative guidance in 2007. One of recent issues is competition over authority between FSC and FTC. However, they could not address this case from the legal point of view and ended up closing the trouble merely by making an agreement on cooperation in advance through mutual MOU. Today an important part of financial institutes’ supervisory system is the self regulation system, and an significant point of this regulation is compliance. Meanwhile, the integral Financial Consumer Protection Bureau is established for consumer protection in Financial Market in this year. Reorganization of a regulation system followed by integration of financial sectors is another consistent issue. This phenomenon is occurring in the legal field as well and complications happen in authority of supervisory agencies. In this situation, the core of financial regulation to bring successful results in the future will depend how to cope with such integral businesses of financial institutions.