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S. Korea: Korea to introduce bank tax
Source: Korea Herald www.koreaherald.com
Source Date: Thursday, December 16, 2010
Focus: ICT for MDGs, Internet Governance
Country: Korea (Republic of)
Created: Dec 16, 2010

By Cho Jin-seo

Reversing its position in less than 24 hours, the finance ministry confirmed Thursday that it was going to launch a bank levy.

Officials at the Ministry of Strategy and Finance said that the plan was all set and will be announced on Sunday, unless there was unexpected turbulence in the financial market over the next two days.

Just a day before, the ministry had issued a press release to deny such reports.

The sudden change in the government’s attitude shows that it has been experimenting with the financial market using rumors of new capital control measures. Throughout 2010, the ministry and financial regulators have speculated on the idea of a bank levy several times but they have never implemented it after watching negative responses.

This time, the result is a green light.

“The government is looking into the matter actively. I suggest you be ready on Sunday,” Shin Je-yoon, deputy minister of strategy and finance, said in a luncheon meeting with reporters.

This has become a typical tactic of the finance ministry in introducing new policies and regulations — it deliberately leaks a message to the market and the media, watches the response, and then makes an official decision on whether to implement it.

On Thursday, another finance ministry official dubbed this practice as “market tasting” as if one tastes wine before purchasing.

For the same reason, it is unlikely the government will introduce several capital control measures at the same time, as that will increase the market impact and uncertainty, he said.

The government has delayed the introduction of the bank levy since at least this spring because of unexpected events such as the European sovereign debt crisis and the military conflict with North Korea. But this time, it believes the worst is over and the euphoria in the current stock market will offset any negative effects on foreign investor sentiment, and silence domestic critics as well.

From Wednesday to Thursday, the stock index and foreign exchange rate saw only modest movement, to the delight of government officials. The KOSPI is back to the pre-crisis level, and the won-dollar rate has been stable over the past month.

The bank levy is one move that can reduce the volatility of the financial market, by discouraging financial firms from taking on too much risk in good times so they have less to lose in bad times.

Under the proposal, banks operating in Korea will be charged a certain percentage for the amount of foreign-currency debts they borrow from other financial firms, which is not covered by the deposit they receive from customers.

Reducing this non-core, non-deposit liability is crucial in stabilizing the Korean financial market because this is where most of the volatility occurs in times of financial crisis, academics say.

The initiative has been strongly driven by Shin Hyun-song, an economic adviser of President Lee Myung-bak. Shin, who teaches at Princeton, also guided Korea’s economic policies and strategies at the G20 meetings this year.

Korea will join the United States, the United Kingdom and a few other nations in creating a new form of bank levy in order to prevent another financial meltdown. The G20 endorsed such measures of defensive capital control during November’s Seoul summit.

How much to levy is the question in many countries, as banks fiercely lobby to lower the rate while academics and regulators want to raise it.

One thing everyone agrees on is that bank levy by itself is not a silver bullet. The government has adopted a series of measures, and is expected to further tighten regulations next year.

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