South Korean Central Banker Shares Lessons Learned in Crisis

Dosoung Choi of the Bank of Korea delivers the inaugural lecture in a series jointly sponsored by the UCLA Center for Korean Studies and Seoul National University. The lectures will look at global issues from Korean vantage points.

This kind of nightmare continued until early March of this year, when we began to feel that "the worst is over."

At a public lecture in UCLA's Faculty Center on Dec. 1, 2009, a member of the central banking committee that makes monetary policy for South Korea explained how the government responded in late 2008 and early 2009 to the global financial crisis. The talk was the first in an occasional, year-long series about global issues as viewed from the Koreas, jointly sponsored by the UCLA Center for Korean Studies and the Seoul National University (SNU) America Center in Los Angeles.

At the lecture Dosoung Choi, the central banker and former professor at SNU and several U.S. institutions, recalled that on the last Sunday of October 2008, upon leaving church he found that his cell phone was teeming with messages. The governor of South Korea's central bank was summoning Choi to an emergency meeting of the Monetary Policy Committee, which sets a key interest rate for the country.

The rate cut decided on Oct. 27, 2008, was not the first for the Bank of Korea (BOK) since private banks began calling in loans, resulting in a credit squeeze and drop in production.  And it would not be the last. At the time, however, it was the largest in BOK's history – a cut of three-quarters of a percentage point that brought the key rate to 4.25. The BOK committee kept easing credit until the interest rate was down to 2.00, its current level.

"This kind of nightmare continued until early March of this year, when we began to feel that 'the worst is over,'" he said.

Among other measures that stopped the economic bleeding, Choi mentioned a currency swap with the U.S. Federal Reserve, massive domestic stimulus packages, and government guarantees on banks' external debts. President Lee Myung-bak made the decision to temporarily cover loans to small and medium business enterprises (SMEs) with government funds.

"Many SMEs would [otherwise] have fallen, and that would have exacerbated the Korean crisis," said Choi.

Choi explained that South Korea's export-driven economy, the world's 13th or 14th most productive, was very vulnerable to external shocks. But by the same token, the sharp fall during the crisis of the Korean won against the U.S. dollar – and therefore against the Chinese renminbi, which remains pegged to the dollar – allowed exports to lead the way to recovery this year.

Another mixed blessing was heavy foreign trading in South Korean stocks. When crisis struck, many investors sold their stakes.

"We didn't know that that [stock market] liquidity would be a double-edged sword," said Choi.

Choi said that the Bank of Korea learned well the lessons of the 1997–98 currency crisis. Although the central bank did not necessarily foresee events, he said, it responded boldly.

"Very few of us really expected that the U.S. authorities would let Lehman Brothers fall" about a month before BOK began cutting interest rates, he said.

Published: Friday, December 4, 2009