Financial Policy and Supervision Cannot Be Cleanly Separated

"They tried to split the organization saying financial policy and supervision should be separated, but now they're adjusting capital regulations to meet policy targets. It doesn't add up."

A financial industry official offered this pointed critique of financial authorities' moves to channel funds into productive sectors. While agreeing on the need to adjust supervisory regulations to redirect funds concentrated in household loans toward high-value-added advanced and venture industries, the official questioned whether this contradicts the government's stated principle of separating policy from supervision.

In the second half of last year, financial authorities raised the risk weight (RW) for mortgage loans from 15% to 20% while lowering the RW for stocks and funds from 400% to 250%, citing the need to curb household lending and expand productive finance. Recently, authorities are reviewing plans to raise mortgage RW further to 25% and discussing capital regulation relief to prevent fines from Hong Kong equity-linked securities (ELS) mis-selling cases from dampening productive finance.

This is puzzling when recalling the financial authority restructuring debate from just six months ago. In September last year, the government and ruling party finalized an organizational reform plan at a high-level policy meeting, citing financial stability and consumer protection. The plan to dismantle the Financial Services Commission, establish a new Financial Supervisory Commission, and transfer policy functions to the Ministry of Economy and Finance was rooted in the principle that "supervisory independence should not be compromised to achieve specific policy objectives." Yet even a government that treated financial stability and consumer protection as sacred is now adjusting the intensity of supervisory regulations to achieve policy targets.

This is less a change in attitude than a demonstration that policy and supervision were never areas that could be cleanly separated from the start. Supervisory regulations are not merely prudential management tools but policy instruments that can redirect the flow of capital. This reaffirms that policy effectiveness can be maximized while minimizing confusion when the two are organically connected.

It is time to revisit the policy-supervision separation debate that recurs with every administration. Some in the ruling party still say "discussions on organizational restructuring are not over," but whether such debates can actually accelerate innovation deserves scrutiny. I hope we can put an end to unproductive arguments and move toward discussions that enhance our economy's competitiveness in the rapidly changing financial and industrial environment.