Lessons for Korea from the Financial Crisis

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Branch Manager and Chief Operating Officer of Deutsche Bank (DB) Korea Michael Hellbeck speaking in Seoul on April 20, 2010. (Asia Society Korea Center)

SEOUL, April 20, 2010 - Speaking at the monthly Asia Society Korea Center luncheon here, Branch Manager and Chief Operating Officer of Deutsche Bank (DB) Korea and chairman of the Foreign Bankers' Group (FBG) Michael Hellbeck delivered a carefully qualified defense of the financial industry, while also acknowledging the obvious shortcomings that helped create the recent worldwide economic collapse. 

Standing before an attentive audience of finance professionals, diplomats, academics, journalists, and businesspeople, Hellbeck took pains to point out that he was speaking not as the head of DB in Seoul but as a private individual. It was clear, however, that his approximately 13 years of experience working in Korea for the German financial giant have given him the insight to address the day's topic, namely "Lessons Learnt from the Global Financial Crisis: Impact on Korea."

Hellbeck began by recapitulating the causes of the crisis: high liquidity, too much optimism, not enough assessment of risk, and low interest rates on borrowed money. These led to a collective search for investments with higher yield that wasn't commensurate with the higher risks taken. Furthermore, investment banks began to pitch more complex financial products that many ordinary people struggled to understand, and this happened within a negligent supervisory framework. In spite of the lax oversight, though, Hellbeck said that overall financial institutions should take the lion's share of the blame, because they "should have known better."

As to the lessons learned from the crisis, Hellbeck saw a consensus that the world financial system should be reformed so as to withstand shocks better. That means two things in particular: a risk management system and financial supervision. He stressed that the latter was to be of a "macro/prudential" nature, rather than a "micro/institutional" nature.

The most urgent requirement, according to Hellbeck, is a globally harmonized system of rules and consistent implementation thereof. Otherwise there will be regulatory arbitrage—a situation in which financial institutions will choose to operate in jurisdictions where the rules are less strict and less enforced, as international ship owners do when registering their vessels.

Contrary to a commonly-held opinion that big banks are bad, Hellbeck claimed that little or no evidence supports this theory, and that many small banks also made mistakes and failed.

Next: The relevance for Korea, and Michael Hellbeck's lessons for ordinary investors