This is the first in a monthly series contributed by executive members of the Financial Supervisory Service to address key ongoing financial issues. ― Ed.

Early in April, the cherry blossoms were blooming in Yeouido, Seoul, where winters are long and cold. The falling petals of cherry blossoms in the spring breeze were beautiful. However, the chill of the wind could still be felt in the streets around the financial district.

The financial services industry represented 5.4 percent of Korea’s gross domestic product in 2014, down from 6.5 percent in 2008, and 3.2 percent of the number of employed persons in the country, down from 3.5 percent in 2008. The Bank of Korea recently adjusted the growth forecast for the economy this year from 3.4 percent to 3.1 percent. It became clear that the financial services industry had failed to support the real economy, indicating a slowdown in the economy. This certainly adds to concerns about secular stagnation.

Financial regulators are working on financial sector reforms in recognition of these concerns. Reform, by definition, means the improvement or amendment of institutions or practices. If we cannot restructure the financial sector to get through a crisis, Korea may follow Japan into its own “lost decade.”

Sputtering growth in the financial sector points to the lack of competitiveness in financial companies, and this was a result of complacency about the regulatory framework. Therefore, we are working aggressively to bring significant changes to our examination and enforcement practices so that financial firms’ ability and desire to innovate, create, and compete are respected to the fullest extent possible.

The focus of examination will no longer be on uncovering violations or imposing sanctions. Instead, our primary motivation will be to help financial firms identify areas of risk. This will mean less frequent examinations and more intense ongoing monitoring of financial firms’ safety and soundness. The responsibility for investigating financial distress such as bad loans will lie with the financial companies, in principle.

As we are creating an environment for innovation to flourish with regulatory reforms, the time is ripe now for financial companies to do their part. It is a player on the ground, not a referee with a whistle.

Since the global financial crisis, financial companies were focused on avoiding risks and maintaining short-term profits. However, this should be stopped. Financial companies should restore entrepreneurship. Executives and officers of financial companies should not be tied to performance during their term in office and negligent in developing long-term management strategy such as future business investment and overseas market entry, which requires in-depth analysis and sophisticated decision-making. In the financial sector, managing risk, not avoiding it, is necessary. A key step for this will be developing their own capability to manage risk.

Another thing that financial companies should keep in mind is that the change requires commitment. As financial regulators are looking to respect financial companies’ ability to operate their business as they see fit, they should improve internal controls so that they do not infringe on the interests of consumers or cause disruptions in the markets in the course of developing new products and services or advancement into new businesses. Financial reforms are designed to change the way markets are supervised, not for loosening the regulatory grip on markets.

The goal of financial sector reforms is to help the financial services industry drive the recovery of the real economy and grow into an autonomous and competitive industry. To this end, financial regulators will push ahead with reforms in a firm and steadfast manner.

Financial distress or incidents that are taking place temporarily in the course of the reforms will not stop our efforts to establish best practices. The regulator will play a “referee” role, assuring that rules of fair play are followed and players on the ground can exert their full capacity. The financial watchdog will no longer be a teacher who interferes with the management of financial companies.

According to Joseph A. Schumpeter, an economist and political scientist, it is the lack of innovation that causes a recession. The time has come for innovation and reforms.

By Seo Tae-jong

The writer is the first senior deputy governor at the Financial Supervisory Service. The views reflected in the article are his own. He can be reached at tjseo386@naver.com. ― Ed.