[Inside Chodong]When Financial Authorities Move Away from the Market

Speed and Connectivity Are Crucial in Responding to Financial Crises
Physical Distance Affects Supervision, Policy, and Safety Net Functions
Market Access and Response Capabilities Matter More Than Relocation

The further financial authorities move away from the market, the closer financial risks may come. As the government unveils the principles and direction for the second phase of relocating public institutions to local areas, the issue of the location of financial authorities and public financial institutions is once again in the spotlight. This should not be viewed simply as a matter of public institution allocation. The core question is not where they are physically located, but where they can function most effectively. If there are plans for relocation, it is essential to present a design that ensures market surveillance and crisis response capabilities are not compromised.

Balanced regional development is important. However, financial authorities are fundamentally different from general administrative agencies. They need to detect risks in the financial market first and act before situations deteriorate.

Financial supervision is not simply about examining documents and figures. Issues such as the insolvency of real estate project finance (PF), tightening in the short-term funding market, as well as sudden shifts in the liquidity and investment sentiment of financial companies, often show up in the market before they are reflected in statistics. Informal signals such as conversations between responsible staff, cash flow, and subtle changes in market prices often serve as the first warnings. While it is possible to receive data electronically and hold meetings via video conferencing, financial crises do not adhere to fixed schedules. What is most important is the time it takes to connect scattered signals, assess risks, and make decisions on countermeasures.

On August 24, union members spoke at a joint press conference held by the Deposit Insurance Corporation and the Financial Supervisory Service labor unions in front of the Blue House Sarangchae in Seoul to firmly oppose the relocation of government agencies. At the press conference, they urged to "exclude the Deposit Insurance Corporation and the Financial Supervisory Service from the second plan for relocating public institutions to local areas, and to reconsider from the beginning based on the effectiveness of safeguarding the financial system and crisis response." Yonhap News Agency

The Financial Services Commission and the Financial Supervisory Service cannot operate independently. When the Financial Supervisory Service detects risks through inspections, supervision, and market monitoring, the Financial Services Commission must link this to policies and market stabilization measures. If physical distance increases the lag between information and decision-making, it poses a risk to financial stability.

The Korea Deposit Insurance Corporation is also a pillar of the financial safety net. Since it is responsible for deposit protection and resolution of distressed financial companies, it must work seamlessly with the Financial Services Commission, the Financial Supervisory Service, the Bank of Korea, and others in terms of information sharing, decision-making, and execution during times of crisis. Although tasks are divided during normal periods, all parties must operate as a unified response system in moments of crisis.

Although policy banks differ in character, their location still cannot be separated from their functions. Korea Development Bank, Export-Import Bank of Korea, and Industrial Bank of Korea, for instance, connect the market with companies in corporate finance, fundraising, restructuring, and export financing, and become channels for policy finance when the market becomes unstable. It is critical to examine whether their relocation would weaken their market accessibility or effectiveness in executing policy finance.

In this respect, London's financial cluster provides a valuable case study. London’s competitive edge does not simply come from the high concentration of financial institutions. Functions such as banking, securities, insurance, asset management, as well as specialized services like law and accounting, and policy, supervision, and regulatory bodies are all closely interconnected. Finance is an industry where the extent to which the market, information, specialists, and decision-making bodies are tightly linked is of utmost importance.

In Korea, we also need to prioritize this interconnectedness over simply the number of relocated institutions. Moving a few institutions will not by itself spur the growth of regional finance. A strategic ecosystem bringing together companies, financial firms, investors, and specialists is necessary. Therefore, core functions such as inspection and supervision, market monitoring, financial policy decisions, and crisis response should be considered to remain in Seoul as a principle. If another choice is pursued, alternatives ensuring that such functions will not be weakened must be presented first. While relocation costs can be calculated in advance, the costs of missing the right moment to respond only become apparent after a crisis strikes.

This content was produced with the assistance of AI translation services.