Economics & Trade Relations

Washington File

15 May 2002

Text: Treasury's Dam Urges Strong Financial Sector for Korea

(Deputy Treasury Secretary Dam May 15 remarks in Seoul) (1260)

The Republic of Korea can help ensure continued economic growth by
developing a strong, resilient financial sector to its economy,
according to Deputy U.S. Secretary of the Treasury Kenneth Dam.

In a May 15 speech before the Korean Chamber of Commerce and Industry
in Seoul, Dam emphasized the importance of a "deep, flexible and
resilient financial sector" for economic growth in the global economy.

"The great challenge for Asian countries in transition, like Korea,
will be financial sector restructuring and development," Dam said.

For the Republic of Korea, the economic integration of the various
economies of the world presents a profound opportunity as well as
challenge, he suggested.

"Access to export markets abroad means new growth for the Korean
economy and greater profits for Korean firms," Dam said.

However, he cautioned, economic integration also has "its downsides,
and the changing winds of the global economy, no doubt, can be
punishing."

Dam maintained that greater openness to the free flow of trade and
investment in financial services would have a tremendous impact on
Korea's economy. "Openness would continue to attract new sources of
foreign direct investment and international expertise. It would reduce
the cost of capital. It would greatly expand the range of corporate
finance products available. And it would deepen Korea's burgeoning
capital market," he said.

Following is the text of Dam's May 15 remarks in Seoul, South Korea:

(begin text)

TREASURY NEWS
FROM THE OFFICE OF PUBLIC AFFAIRS

FOR IMMEDIATE RELEASE
May 15, 2002
PO-3101

"Transforming Korea's Financial Sector into a Domestic Engine of
Growth"
Deputy U.S. Treasury Secretary Kenneth W. Dam
Korean Chamber of Commerce and Industry
Seoul, Korea

Good morning. It is a great honor for me to have the opportunity to
address this impressive assembly of Korean business executives.

I am also privileged to be making my first trip to Korea in my
capacity as Deputy Secretary of the United States Treasury. I've been
to Korea many times before. The importance of this particular visit
could not be greater.

I am here to launch a new effort aimed at transforming financial
sectors into economic engines of growth. This is a new Bush
Administration international economic policy initiative. We are
calling it "Engines of Growth."

Why is this important to the United States and Korea?

For one, the fate of all our economies is intertwined. Economic growth
is not a zero-sum game. When the United States grows, Korea grows. And
vice-versa. It's just that fundamental.

For Korea, the consequences of this economic integration are profound.
Access to export markets abroad means new growth for the Korean
economy and greater profits for Korean firms. But economic integration
also has its downsides, and the changing winds of the global economy,
no doubt, can be punishing. Hedging against these risks is essential.
In this economic landscape, countries like Korea must have strong,
efficient financial sectors: in short, domestic engines of growth.

Just look at the United States. Our financial sector is the backbone
of our economy. During last year's U.S. economic slowdown, for
example, it was innovations in our financial sector - in addition to
tax relief measures and monetary easing - that helped fuel the
economic recovery we are currently experiencing. It was access to new
mortgage products that kept U.S. consumers spending and sophisticated
debt instruments that kept businesses investing.

The economic importance of a deep, flexible and resilient financial
sector cannot be overstated. Gone are the days when a national airline
or government-directed investments in manufacturing are the badges of
economic development. In this decade, the great challenge for Asian
countries in transition, like Korea, will be financial sector
restructuring and development.

Transforming Korea's financial sector into an engine of growth will
not be without challenge. But I believe Korea is up to the task. In
four short years, Korea has done much of what others in the region
have been slower to achieve. Failed banks have been recapitalized.
Many non-performing assets have been sold. Financial regulation and
supervision has been strengthened. And Korea's capital account has
largely been liberalized.

The results are clear. Private banks are once again profitable.
Capitalization ratios have improved, and the number of non-performing
loans is down. Though many reforms remain, the process of change is
well underway.

The next step for Korea - greater openness to foreign presence - will
require enlightened policymaking, a deep commitment to openness, and
the very best regulatory oversight and enforcement. It will require
that economic policymakers forge ahead, despite vested interests. And
it may require a new and deeper faith in the markets. I have
confidence Korea can succeed. New benefits will abound.

Greater openness to the free flow of trade and investment in financial
services would have a tremendous impact on Korea's economy. Openness
would continue to attract new sources of foreign direct investment and
international expertise. It would reduce the cost of capital. It would
greatly expand the range of corporate finance products available. And
it would deepen Korea's burgeoning capital market.

Don't just take my word for it. A 2001 World Bank study found that
countries with fully open financial services sectors grow, on average,
one percentage point faster than other countries. These results
corroborate an earlier World Bank study estimating that more open and
competitive financial services markets increase national growth rates
by 1.3 to 1.5 percentage points. Likewise, a recent WTO study of 27
emerging market countries found that allowing foreign financial firms
to establish locally and to engage in a broad spectrum of financial
activities contributed to greater financial sector stability.

Let me say a word about regulation and supervision, an area in which
Korea is making gains. Every effort should be taken to apply new,
transparent methods for drafting and applying regulations. Regulators
should seek out the insights of the private sector before creating the
rules of the game. We use these methods in the United States.

The U.S. Federal Reserve, for example, regularly publishes proposed
regulations and asks for comments from the private sector in a
reasonable period of time. During the implementation of our
Gramm-Leach-Bliley bill -- which fundamentally reformed the U.S.
banking, securities and insurance sectors -- the U.S. Federal Reserve
sought out and received hundreds of comments from foreign banks. As a
result, it made several significant changes to accommodate the many
international banks doing business in the United States. Rules that
specify how regulations will be implemented and how applications for
licenses will be granted or denied are equally as important.

My mission here in Asia this week has been to engage key policymakers
in a dialogue aimed at building momentum for financial sector
liberalization. Economic policymakers must collaborate on financial
sector development if we are to enjoy sustained economic growth.

Therefore, I leave you with a challenge. Look around the world. Just
about every advanced economy has an open financial sector. For these
countries, the financial sector is a fast, efficient engine of growth.
Yesterday, I asked key economic policymakers to partner with the
United States in a senior-level dialogue on greater financial sector
openness. Today, it is up to you - the business sector - to ensure
that Korea's economic policymakers speed the path of financial sector
reform. Closed markets to financial services benefit no one. Thank
you.

(end text)

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