Kyungsoo KimInstitute for Monetary and Economic Research,

Bank of Korea

} Comprehensive analysis of the causes/background factors for the recent financial turmoil

} The lessons from the analysis

} How to amend the financial safety net

} Why the US government's New Proposal for crisis resolution has not been welcome?

} What will be the impact of prolonged financial turmoil in the US to the EMEs?

} What would be the concrete shape of macro-prudential policy?

▶By raising several questions, hope to share some common views with you

} Mr Geithner announced "the Financial Stability Plan," on Feb 9, including the measures as belows;

◦ Capital Assistance Program◦ Public-Private Investment Fund (up to $1 trillion) ◦ Consumer & Business Lending Initiatives (up to $1

trillion)◦ and others

} However, it seemed to fail in helping the market restore the confidence

} The reasons are;

◦ It does not carry concrete measures to end the turmoil◦ It admits indirectly; it takes time to fix the banking

system by completion of stress tests for major banks(with assets of $100 billion-plus)

} These facts remind a new question; Is there any missing point in understanding the US financial system or detecting the cause of the turmoil?

⇒ Hope to hear your opinion on this issue, and also please give us a view, if you have any, how to fix the US banking problems

} The EMEs; Victim of Sudden Stops

◦ Last year, we saw several cases in which small countries in every continents suffered from a lack of foreign currency liquidity

◦ In fact, they were "honored students", faithfully pursued the liberalization policy guided by advanced countries and international society, including the Fund

◦ Admitting their own mistakes, the major cause was definitely the unexpected event

} In addition, the EMEs hit by export-linkages

◦ Shrinks in import demand by world major countries dampen production and employment in the EMEs

} Furthermore, it may be worried that the prolonged financial turmoil may bring a new brand of protectionism

◦ The government, like the US, inevitably urges capital-injected banks to operate their money for domestic end-users

◦ Traditional protectionism aims at international flow of goods

◦ In contrast, financial protectionism tries to set barriers to the flow of money

⇒ In this regard, what should be done by the EMEs, like Korea, which is connected to the world through both the export and financial channel?

} Does the Fund have any idea to remit financial protectionism?

} Given large trade volume and financial integration with the rest of the world, Korea is one of the most affected countries

} In line with the worldwide economic downturn, the Korea’s GDP growth this year is expected to be substantially lower than last year's

◦ Considering the following, however, the Korean economy will be able to grow more than the IMF recently projected (-4% in 2009)

◦ The sharp decline in oil and raw material prices is likely to act as a partial buffer against the rapid contraction of the purchasing power of the Korean economy

◦ Korea still has a room for actively managing monetary policies in a bid to loosen the credit squeeze

◦ The Korean government is preparing a series of complementary stimulus measures through early budget execution

◦ The future economic developments in Korea depend critically upon stabilization of the financial markets, intensity of the global recession, and timing of the global economic recovery

◦ For the recovery of the Asia's major exporters including Korea, it is crucial to prevent the expansion of beggar-thy-neighbour policies of erecting barriers

} Fully agree on the issues of Macroeconomic Policies and Global Architectures suggested

◦ Especially interesting in the Macro-prudential policy

– You suggested it as one policy scheme to prevent a financial turmoil in the future

– It seems to me that Korea also needs to adopt the Macro-prudential policy; monitoring the whole financial system with a bird's eye view to prevent financial turmoil

◦ Nevertheless, it is hard for me to understand macro-prudential policy

– Literatures from the fund, BIS, and others, do not show the whole aspects of the policy framework

⇒ As a staff, from the fund, main player for the FSAP (Financial Stability Assessment Program), by lead of your Department

◦ please explain the essence of macro-prudential policy in detail, and

◦ what will be the role of central bank under the new policy framework?