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

In 2015, financial reforms and risk management emerged as a major issue in Korea’s financial industry.

Most said that Korea’s real economic sector has significantly expanded, but the financial sector does not have the corresponding scale and capacity. And it has been pointed out that competitiveness of the financial sector should improve for sustainable growth of the Korean economy.

Against this backdrop, the Korean government is putting efforts to enhance efficiency in the financial industry and improve financial services and is also continuing financial sector reforms from last year. As part of its efforts, the government supported the development of fintech -- approving Internet-only banks and introducing the bank account switching system. Furthermore, it has reformed irrational and unfair financial practices. And these efforts will continue this year.

Meanwhile, given domestic and overseas financial market conditions, an effective risk management is crucial for Korea’s financial market and financial authorities. Above all, amid a global recession, concerns have mounted over an economic slowdown in China, which is Korea’s biggest business partner. In addition, unprecedented rock-bottom interest rates and liquidity oversupply have increased volatility in the global financial market.

On top of this, while household debt continues to accelerate, marginal companies’ debt is an issue that should be tackled without delay.

Therefore, both financial reforms and risk management are grave and urgent matters to maintain sustainable economic growth.

Then, how can we define the relationship between financial reforms and risk management? Do they collide with each other or are they mutually complementary? Do they need to be promoted at the same time or should they be handled in order of importance? Which one should go first if prioritization is necessary?

Having a discussion and reaching a consensus in society are very meaningful, necessary processes for setting the right direction of financial policies and securing an effective driving force to promote the policies.

Discussion and consensus would be more important especially when we consider that no good result can be produced without a wide scope of social agreement or support for unpredictable conditions and policies regarding the current financial market. If market players continue discussion but express various opinions based on their own interests, it may not be easy to reach a consensus.

However, as mentioned above, it is necessary to continue thorough discussion and serious consideration. And I believe that financial reforms and risk management are mutually complementary, since the ultimate goal of reforms is to develop a robust financial industry which can overcome crises and have a sound financial system in place.

If financial reforms center on preemptively removing intrinsic risk factors of Korea’s financial industry and developing ability to respond to crises, reform itself can become the most effective method for risk management. On the other hand, if reform efforts focus on short-term results or superficial changes, precious time and capacity would be wasted, which results in increasing risks.

Therefore, what matters most is to correctly understand conditions and situations of the financial market and set the right direction for financial reforms.

By Seo Tae-jong

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