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


By Kim Young-ki

We have often heard of “shadow banking,” which is considered to trigger financial crises. Now “shadow regulation,” the regulatory version of shadow banking, has become a familiar term. The word “shadow” is mostly taken in a negative context that symbolizes darkness and unconsciousness, much in contrast with “light.”

Due to its function of managing people’s assets, the financial sector inevitably faces to a strict regulatory framework. These regulations should at all times be based on laws so that the regulated may predict and accept the restrictions that they have to submit to.

But where there is light, there is shadow. Shadow regulations are partly accepted in financial circles, as they make up for imperfections of the existing legal clauses and help regulations have their intended effect.

While financial authorities have been actively promoting a series of financial reforms in order to add stimulus to the economy, concerns are being raised that hidden regulations, or shadow regulations, are impeding the creativity and innovation of financial players. In a survey conducted in July on financial workers and experts, only 21.8 percent of the respondents answered that unofficial administrative guidance has been eradicated ― the rest of the pool thought that “shadow regulations” were still prevalent. In response, the Financial Supervisory Service and the Financial Services Commission came up with an improvement plan to address shadow regulations in September.

The core of the improvement plan is to eliminate dark shadows and to highlight light shadows, so as to allow financial companies to work creatively and innovatively.

First, administrative guidance that has no legal basis but requires companies’ voluntary cooperation will be have to be officially documented. Also, no sanctions are to be imposed on noncompliant companies.

Second, even when lawfully urging caution or providing guidance, financial authorities should collect relevant opinions and go through control procedures in order to minimize unnecessary burdens on the financial market.

Third, financial authorities will officially be banned from intervening in the pricing process of financial products, in order to promote the autonomy and vigor of the market.

Lastly, third-party experts will conduct a review on whether these improvement plans are properly implemented.

These plans will be institutionalized as “financial regulation operating rules” from December and there will be strict sanctions for violations of them.

Timothy F. Geithner, the former U.S. treasury secretary who led the country’s economy out of the financial crisis through reform, said in his recent book “Stress Test” that government regulation and supervision were crucial. He also stressed that the government should continually work to keep up with financial innovation through regulations. We have learned from experience that without proper regulation and supervision, the financial sector can easily face a crisis that delivers a major blow to the national economy.

In developed countries, financial authorities have not only institutionalized regulations but are also expressing their opinions through moral suasion using informal channels such as lectures, speeches, parliamentary reports, news releases or press interviews. But all of these informal regulations should be built on an active communication between the government and the market. The goal of the shadow regulation improvement is to reduce the burden for financial players and thus to help the market advance in a creative manner.

Shadows, which are attached to every single existence on earth, reflect the actual shape of the original object. They should not necessarily be dismissed as something dark, inconvenient and negative. We hope to operate shadow regulations in a rational, transparent way so that financial companies may optimize their autonomy and creativity, and thus achieve results that accord with the intent of financial reforms.

The writer is the deputy governor at the Financial Supervisory Service. The views reflected in the article are his own. He can be reached at ykk9209@fss.or.kr ― Ed.