South Korea's parliament on Wednesday approved a bill aimed at beefing up the Bank of Korea's (BOK) role in coping with financial instability, paving the way for the central bank to play a role in preventing another financial crisis.
On the last day of the extra session, the National Assembly passed a revised bill governing the BOK in a 147 to 55 vote, allowing the central bank to keep financial stability as its policy priority, together with price stability.
The amendment has been drifting for more than a year in the National Assembly amid sharply divided opinions among stakeholders. The regulator and local banks have been opposing the revision, claiming that the move will decentralize the watchdog's regulatory rights, thereby increasing burdens on financial firms due to potential frequent inspections.
The passage of the bill will empower the central bank to cope with financial instability and conduct macro-prudential policy, paving the way for the BOK to tackle potential financial turmoil.
The law regulating the BOK's activities was last revised in 1998, making price stability the central bank's top priority while its authority to supervise local banks was transferred to the Financial Supervisory Service (FSS), the financial regulator.
But the global financial crisis and recent scandals over ailing savings banks, following the financial watchdog's regulatory mishap, have lent support to revising the BOK law so as to strengthen its role in stabilizing the financial system.
The bill will legally guarantee the BOK's right to request the FSS, the financial watchdog, to jointly inspect financial firms. If the BOK requests a joint probe, the FSS is required to launch the investigation within one month, which will be listed by presidential decree.
Local banks will also be required to put aside cash reserves for their bank bonds, a move that the lenders oppose because it will likely hurt their profitability.
Currently, Korean banks are required to set aside a certain amount of customer deposits in cash at the central bank.
But the bill did not reflect the BOK's wish to investigate local financial firms' business practices on its own when lenders face an acute shortage of liquidity.
Some experts said that a failure to secure authority to probe financial firms would limit the BOK's push to promote financial stability.