In a free and competitive financial market, resources are efficiently allocated via interest rates―i.e, the price of money―not only enhancing total output, investment and employment but also driving out or restructuring inefficient firms. Indeed, a well-functioning financial market, by allocating financial resources, fosters new firms consistently to enable competition between efficient firms, promotes investment to enhance productivity and increases employment to nurture economic growth. However, there is the possibility that private financial institutions will take unduly high risks driven by excessive profit seeking, and such a practice, if unchecked or poorly managed, can pose a serious threat to the entire financial system. This is why financial regulations and supervision are needed.

As such, certain premises are assumed for an efficient and stable financial market, which include an advanced private financial market, minimized government role and guaranteed independence of the financial supervisory authority. Nevertheless, governments are often tempted to intervene in the private financial market for a range of reasons―underdeveloped financial market, pressure from concerned interest groups/political parties, industrial upgrading, short-term economic stimulus and so on. Given the high information asymmetry in the financial market, government intervention will disrupt the allocation of credit into where it could be used most efficiently, meaning a loss of the financial market’s functional efficacy. Even in such cases, if the government remains only as a ‘regulator,’ the supervisory authority―independent from the government―would be able to put certain restrictions on government intervention, but if the government holds the authority to supervise, too, its intervention in the financial market would be like a car without brakes.

This study adopts various angles to address the structural problems within the financial market in which conflicts of interest reside over pressure from interest groups/ political parties, industrial upgrading and short-term economic stimulus. Furthermore, the ultimate purpose of this study is to redefine the role of government in the financial market and to draw upon measures to minimize the problems arising from conflicts of interest.

Preface
Overview and Executive Summary

Chapter 1 The Political Economy of Government Intervention in Financial Markets (Jaehoon Kim)
　Section 1 Introduction
　Section 2 Literature Review
　Section 3 Research Questions
　Section 4 Data Description
　Section 5 Analysis of the Impact of State-Owned Enterprise (SOE) Credit
　Section 6 Determinants of SOE Credit
　Section 7 Conclusion and Policy Implications
　References

Chapter 2 The Economic Effects of Government Intervention Through Bailout Guarantees (Sunjoo Hwang)
　Section 1 Introduction
　Section 2 Importance of Bailout Guarantees and the Bail-In System
　Section 3 Welfare Effects of Bailout Guarantees: Theoretical Analysis
　Section 4 Discussion of Analysis Results
　Section 5 Conclusion and Policy Implications
　References

Chapter 3 The Impact of Hiring Former Financial Regulators on the Management of Financial Firms (Keeyoung Lee, Sunjoo Hwang)
　Section 1 Introduction
　Section 2 Does the Revolving Door Phenomenon Exist in the Financial Sector?
　Section 3 Is the Revolving Door Phenomenon Socially Desirable?
　Section 4 Conclusion
　References

Chapter 4 Analysis of Financial Cycles and Directions for Improving the Macroprudential Management System (Youngil Kim)
　Section 1 Introduction
　Section 2 Financial Cycles and Discussions on Macroprudential Policy
　Section 3 Analysis of Macroprudential Risks: Focus on Financial Cycles
　Section 4 Vulnerabilities in the Macroprudential Management System
　Section 5 Directions for Improving the Macroprudential Management System
　Section 6 Conclusion
　References

Chapter 5 Relationship Between State-Owned Banks and the Independence of Financial Supervision (Daehee Jeong, Jaehoon Kim)
　Section 1 Introduction
　Section 2 Review of Previous Studies
　Section 3 Empirical Analysis
　Section 4 Case Study: Capital Expansion of Korea Development Bank
　Section 5 Policy Implications
　Section 6 Conclusion
　References
　Appendix

ABSTRACT