Identification of Systemically Important Financial Institutions and Implications for Financial Architecture in Korea

Abstract

The global financial crisis has put a spotlight on concerns about financial system stability. Currently, there are discussions about how to identify systemically important financial institutions (SIFIs) and how to strengthen regulatory measures for these SIFIs. Against the backdrop, this study aims to identify SIFIs by measuring inter-sectoral financial transactions with the flow of funds (FOF) account as a measure of interconnectedness. The empirical results show that banks or insurance companies can be SIFIs only in terms of size. However, foreign banks' branches (FBB) and credit-specialized institutions can also be SIFIs in terms of interconnectedness. Especially the systemic importance of FBB in Korea has increased considering the fact that financial crisis in Korea resulted mainly from foreign exchange market. Therefore, more specific discussions and regulatory measures for SIFIs will be required from the perspective of capital market development and Korea's situation.