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(2nd LD) Parliamentary committee passes bill to widen BOK's role

All Headlines 18:10 December 07, 2009

(ATTN: UPDATES with more details in paras 6-8; 11-13)

SEOUL, Dec. 7 (Yonhap) -- A parliamentary committee approved a bill Monday to beef up the Bank of Korea (BOK)'s role in coping with financial instability and give the central bank limited authority to investigate practices at local financial firms.

The legal revision by the Strategy and Finance Committee of the National Assembly is aimed at allowing the BOK to play a wider role in enhancing financial stability in the face of turmoil. The bill is subject to approval by the parliament's judiciary committee.

The current 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 watchdog.

But the global financial rout, sparked by the collapse of Lehman Brothers last year, has drawn calls to revise the law so as to strengthen the BOK's role in stabilizing the financial market along with its main goal of curbing inflation.

The bill allows the central bank to launch a probe into practices at local banks on its own if the FSS refuses to conduct joint inspections without proper reasons. Under a preliminary deal clinched in September between the two bodies, if the central bank requests a joint inspection after its monetary policy meeting approves it, the watchdog should launch the investigation within one month.

"Under current law, it is difficult for the central bank to aggressively respond to a crisis," BOK Gov. Lee Seong-tae told lawmakers in September.

However, the bill also imposed more responsibility on the central bank. For example, its must now submit its policy meeting minutes to the National Assembly.

The BOK said it is necessary to revise the law to ensure financial stability, but it also struck a cautious note, saying there is still a long way to go before the final passage of the bill.

The government and the financial regulator opposed the revision this year, saying the current supervisory system is not seriously flawed when it comes to dealing with financial turmoil.

"It is regrettable that the bill was passed by the committee," Chin Dong-soo, chairman of the Financial Services Commission, said in a statement. "The results that came out run counter to the global trend in discussion over supervisory rights."

The country's bank association also expressed its opposition to the law revision, saying that the move could incur costs for banks if they undergo redundant inspections.

If the bill passes into law, lenders will be required to put aside cash reserves for their bank bonds. Currently, they have to set aside a certain amount of customer deposits in cash at the central bank.

"The move will hurt banks' balance sheets and result in a rise in market interest rates," the Korea Federation of Banks said in a statement.


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