choongsoo kim : financial integration, financial stability and central banking speech by mr choongsoo kim, governor of the bank of korea, at the international conference on “ financial integration, financial stability and central banking ”, organized by japan financial services agency, tokyo, 10 february 2012. * * * good morning, ladies and gentlemen. it is a true pleasure and privilege for me to be here this morning. i am very grateful to commissioner hatanaka of the financial services agency, chairman mae of japan securities dealers association, and president saito of tokyo stock exchange group, for inviting me to this conference as a keynote speaker. as we all know, the global crisis has demonstrated how financial disruption in a major economy can quickly spill over to affect the entire world, through a complex web of interconnected markets and cross - border exposures. and while causing global recession, these spillovers also manifested themselves in diverse forms, depending upon where the weakest points in the vulnerability chain lay – for example, leading to fiscal crises in advanced economies and to abrupt capital flow reversals in emerging economies. the crisis also revealed a number of shortcomings in our financial regulation and supervision, as shown for instance by our failure to detect the systemic risk arising from pro - cyclicality and nonlinearity in asset prices. given its far reaching impact on the financial sector and the broader economy as well, the global crisis has and will continue to cast a long shadow on financial and real activities over the coming years if not decades. but it has also brought us important lessons and new thinking about central banking, financial regulation and fiscal prudence. and we have made substantial progress, ranging from formulating a strengthened regulatory framework to laying the foundation for better international policy coordination through bodies such as the g20. and now, as we enter our fourth year since the crisis, i would argue that it is time to pay greater attention to reviving economic growth and the related policy agenda. the ensuring of financial stability – or more broadly macroeconomic stability – is of course a prerequisite for reviving growth, but the converse is also true. the real and financial sector linkages in other words involve two - way traffic. and indeed, it is hard to imagine that the highly indebted countries in europe will be able to succeed in putting their public finances on sustainable footings if their growths remain stagnant. in this respect, global financial resources may have in recent years been directed too much toward financing of un

also very important that we manage changes in the cpi appropriately. one of the characteristics of the structure determining inflation in korea is that price determinants on the supply side, such as oil and vegetable prices, have greater influences than they do in other countries. and the stability of these prices has kept inflation below the lower bound of the target range for the past few months. since economic agents ’ inflation expectations remain at around the 3 percent level, however, there still exists an inflationary bias. moreover, when we look at the international discussions we see two extremes of arguments. some on the one hand say, considering the sustained low inflation in many countries since the crisis, that inflation concerns have now vanished and we should prepare ourselves instead for the risk of deflation resulting from the hoarding of liquidity. as an aftereffect of the excess liquidity supplied by advanced countries ’ quantitative easing policies, in contrast, others expect inflation to be unavoidable in the future. and since the korean economy is very sensitive to changes in external conditions, we, as the nation ’ s central bank, must be prepared to cope with whatever future course the global economy takes. second, maintaining financial stability has become one of the major responsibilities of the bank of korea, as since the 2011 revision of the bank of korea act we have begun placing greater emphasis on macroprudential issues than before in our joint inspections of financial institutions, and have gained increased access to data from financial institutions. we have also successfully constructed an econometric model for systemic risk assessment, and are working now on improvement of our financial stability report, a statutory report submitted biannually to the national assembly, so that it can be recognized at the global level. while in the process of overcoming the global financial crisis advanced countries have been managing their own economies in exceptionally low interest rate environments, we must bear in mind the comment that, in such an environment, the possibility should never be overlooked of the accumulation of economic vulnerabilities. the possibility of funds flowing continuously to businesses subject to restructuring can also not be ruled out, and the vulnerabilities of these businesses will become immediately apparent if there is any hike in global interest rates. we must continuously monitor the markets to pick up imperceptible signs of a crisis, closely analyze the data to identify any possibilities of tail risk, and develop capabilities to maintain financial stability. we must also redouble our efforts to ensure that we are not overlooking any tail risks, by