choongsoo kim : global and local economic trends and challenges for the bank of korea ’ s monetary policy speech by mr choongsoo kim, governor of the bank of korea, at the seoul financial forum, seoul, 17 august 2010. * i. * * greetings good morning, i am indeed delighted to be here with you this morning to deliver a speech at the “ seoul financial forum ”, which is focused on helping korea as a premier international financial center in northeast asia. let me take this opportunity to express my deep thanks to all participants in this forum and especially to chairman kim ki hwan, for this invitation to address you. i intend to survey with you the current state of the economy at home and abroad and then to talk to you about the monetary policy challenges that lie ahead. ii. global and local economic trends the world economy let me look first to developments in the world economy, which are one of the more important factors in judging the course of the korean economy, whose growth is heavily dependent upon trade with the world economy. in fact the world economy is generally deemed to be maintaining a recovery, even though there are differences from country to country in its pace. giving the lie to initial worries following the global financial crisis that the economic recession would prove prolonged, countries around the world have found themselves on a relatively rapid recovery track. this was certainly greatly helped at least until the end of last year by the policy effect stemming from the bold and decisive monetary and fiscal policies put in place. more recently though, there have been stirrings of recovery in the private sector ’ s self - sustaining growth dynamism against the backdrop of an increase in the volume of world trade and improvement in the labor market. strikingly the global recovery is being led by the asian emerging market countries, of which club korea counts itself a member, with the rapid growth of india and china and the consequent expansion of intra - regional trade. that said the picture is not without several downside risk factors. in the us economy, where anticipations of an economic recovery were running high early in the year, labor and housing market related indicators have recently been coming in more subdued than expected and consumer confidence has also deteriorated. reflecting these conditions the federal open market committee back - pedalled somewhat from its previous upbeat note in its appraisal of the state of economic activity in its statements of the monetary policy direction this june and august. specifically, last week, on 10th of august, the fom

##bs ) and other setters of international standards are leading this discussion, major central banks around the world have taken an active part in it. in contrast to the past, the present debate on financial reform is taking place within a framework of close international cooperation under the aegis of the g20, and also the scope of financial reform is becoming wider and more embracing. we may say that there are four items on the agenda for financial reform now under discussion. firstly the basel committee on bank supervision is leading the discussion on the strengthening of banks ’ capital and liquidity regulations. the background to this is the criticism that, as the recent financial crisis unfolded, the existing scheme of capital regulation under basel ii was simply not up to its function as a tool for crisis prevention. let me give you an example. even banks with satisfactory capital adequacy ratios under basel ii became distressed. the expansion of excessive leveraging served as a factor in ramping up financial system instability. secondly, in addition to strengthening the existing micro prudential regulations, this item on the agenda sets out to construct a framework of macro prudential regulation to deal with systemic risks. spurred on by the financial crisis, the importance of macro prudential policy has come to be emphasized as the missing pillar within the existing edifice of financial stability. to put it another way, macro prudential policy for the management of overall risk within the financial system is needed because the micro prudential soundness of individual financial institutions alone cannot guarantee the stability of the financial system as a whole. among macro prudential regulations, the main focus is directed to those targeting systemically important financial institutions ( sifis ). in line with the question of being “ too big to fail ” that arises in the case of systemically important financial institutions, this proposal needs to be pursued to avoid financial system stability being put at risk by moral hazard. third on the agenda is enlarging the objects of regulation from financial institutions alone. this involves strengthening the regulation of over - the - counter derivatives markets and hedge funds, whose riskiness was highlighted by the latest financial crisis, and also that of credit rating agencies. the last item on the agenda is to build a global financial safety net ( gfsn ), which is part of the “ korea initiative ” as it was put forward by korea. the financial crisis that erupted in the united states and other advanced countries inflicted serious damage on a number of countries for no - fault of their own