Korea Capital Market Institute

Benchmark rates are used as reference rates to determine the payoff of various financial transactions, including interest rate derivatives, floating rate loans and floating rate notes (FRNs), and have a significant impact on the operation of financial markets and the financing and operation of economic entities. Since the mid-1980s, Inter-Bank Offered Rates (IBORs), mainly LIBOR, EURIBOR, and TIBOR, have been adopted as key benchmark rates in global financial markets. However, in 2012, the discovery of widespread rate manipulation across the major IBORs, including LIBOR, EURIBOR, and TIBOR, prompted global regulators to reform the entire benchmark rate regime to promote financial stability and protect financial consumers. Key countries (U.S., U.K., Switzerland, euro area, and Japan) have finalized their benchmark rate reforms, and other countries are making significant progress. The global reforms have shifted the global benchmark interest rate regime away from IBORs and toward a new set of benchmark rates: near risk-free reference rates (RFRs). Korea also improved its CD yield calculation method, which is the existing IBOR, in line with global changes, and selected the Korea Overnight Financing Repo rate (KOFR), an overnight RP transaction rate that uses government bonds and monetary stabilization bonds as collateral, as the RFR. In 2023, the Council on Benchmark Interest Rates and Short-Term Financial Markets was formed, and in the second half of 2024, efforts to improve the benchmark interest rate system began in earnest, with a key focus on expanding the application of the KOFR to financial transactions. In order to improve the effectiveness of domestic benchmark rate reforms and ensure international harmonization, it is necessary for financial institutions and financial authorities to understand global benchmark rate reforms. This study examines the background and progress of global benchmark reforms in major countries and explores the implications for Korea. This study categorizes the economic activities related to the benchmark rate into the calculation of the benchmark rate and the application of the benchmark rate to financial transactions. Based on this analytical framework, we examined the characteristics and limitations of the LIBOR(IBOR) regime in the past and the reforms of benchmark rates in major countries. The IBOR regime, like LIBOR, is characterized by the following features in terms of its calculation and use of an benchmark rate. First, IBOR is calculated using expert judgment (estimates) submitted by panel banks, not actual transactions. Second, in terms of the use of the benchmark rate, although the appropriate benchmark rate for each financial transaction may differ depending on the purpose of the transaction, the IBOR regime does not reflect the suitability of the benchmark rate for the financial transaction, and IBOR is used as the benchmark rate for various financial transactions to maximize liquidity externalities. As a result, the IBOR regime has created an inverted pyramid structure in which the IBOR, which is poorly traded, supports the entire financial market. In particular, most of the inverted pyramid in the IBOR system originated from interest rate derivative transactions rather than cash transactions such as bonds and loans. In such a structure, if the credibility, efficiency, and robustness of IBOR is undermined, it will have far-reaching effects on the entire financial market and economic entities. In response, global regulatory authorities, led by the Financial Stability Board (FSB), have undertaken reforms to fundamentally address the structural weaknesses of the IBOR regime. The key principles and directions of global benchmark reform can be summarized as follows. The first is the transaction-based principle, which states that in terms of the calculation of the benchmark rate, the benchmark rate should be based as much as possible on actual transactions and not rely on expert judgment. The second is the indicator suitability principle, which aims to avoid the structural problem of financial markets’ over-reliance on fragile indicator rates such as IBOR by considering their suitability for financial transactions when using benchmark rates. In line with these principles, global financial authorities have refined the existing IBOR calculation methodology to expand the real-transaction basis for calculating benchmark rates and introduced a new benchmark rate, the RFR. While the IBOR reflects the unsecured funding risk of banks, the RFR was introduced to capture the risk-free market rates, which excludes the credit risk of financial institutions. Next, in terms of the use of benchmark rates, to ensure the appropriateness of benchmark rates for financial transactions, the standard reference rate for interest rate derivative transactions was changed from IBOR to RFF, while for cash transactions such as loans and bonds, IBOR can continue to be applied according to the needs of financial institutions. Global financial authorities have prioritized the application of the RFR to interest rate derivatives as the most important task of the benchmark rate reform, given that interest rate derivatives account for most of the inverted pyramid structure of the IBOR system and that the main purpose of interest rate derivatives is to manage the risk of fluctuations in the risk-free market interest rates, which does not include a bank’s credit risk. Major countries have promoted benchmark reform in accordance with the above multiple-rate principle, but the decision to stop calculating LIBOR, the core benchmark rate for global financial markets, marked a turning point in the differentiation of benchmark rate systems by country. The U.S., U.K., and Switzerland ceased publishing LIBOR, which had been used as IBOR, and formed a single RFR regime, where each country’s newly developed RFR (U.S. SOFR, U.K. SONIA, and Swiss SARON) is used not only for interest rate derivatives transactions but also for all financial transactions that used to apply LIBOR. The euro area and Japan, on the other hand, have chosen to maintain their own IBORs, EURIBOR and TIBOR, and are therefore applying a multiple-rate regime that combines RFR (euro area €STR, Japan TONA) and IBOR. The adoption of a single RFR regime by the U.S. and U.K. has expanded the role of RFRs in global financial markets beyond what was initially anticipated. To summarize the progress of the reforms in the major countries, here’s how it went The US, UK, and Switzerland have successfully replaced LIBOR with the RFRs in all derivative and cash transactions. Even in Japan, which retains TIBOR, RFR has become the standard reference rate for all financial transactions except lending. In the euro area, the use of RFR for derivatives is also spreading, with bonds also using RFR as a reference rate at a significant level. The adoption of RFRs has been slower than initially expected due to strong liquidity externalities in interest rate derivatives transactions. As a result, global financial authorities have introduced public measures such as the RFR First Initiative to encourage the use of RFR. It was widely expected that it would be difficult for FRNs to adopt RFRs because using RFRs as a reference rate for overnight rates would result in a later interest rate determination than IBOR-linked FRNs. However, the financial markets were highly receptive and RFR quickly became the standard rate for newly issued bonds. The use of benchmark rates for loans varied by region, depending on a number of factors, including whether IBOR was retained, legal regimes (consumer protection and antitrust laws), and borrower preferences. In the euro area and Japan, where IBOR is retained, EURIBOR and TIBOR continue to be the core reference rates for loans, while in the US, UK and Switzerland, LIBOR loans have been converted to RFR loans. Using RFR as the reference rate, which does not reflect the bank’s credit risk in the loan, forces the bank to bear the (asset-liability) basis risk of the loan, which it could previously transfer to the borrower. For this reason, some banks and academics have raised concerns that a single RFR regime could reduce credit creation by banks and increase borrowing costs for economic agents compared to when IBOR lending is available. While this controversy has not arisen in the United Kingdom and Switzerland, in the United States, small and mid-sized banks and regional banks have raised the need for an alternative benchmark rate that reflects banks’ funding costs. In response, the private sector took the initiative to introduce Credit Sensitive Rates (CSRs) that reflect banks’ credit risk. However, the FSB, IOSCO, and U.S. financial authorities have recognized that while CSRs have the advantage of reflecting banks’ credit risk, they are not in line with the IOSCO Principles, the global standard for benchmark interest rates, due to the lack of underlying transactions similar to LIBOR, and suffer from the same structural problems as LIBOR. As shown above, the formation of a global benchmark ecosystem centered on RFRs should be viewed as an irreversible trend as major countries have improved their benchmark regimes over a long period of time, more than a decade. In addition, if other countries’ IBORs are utilized in global financial markets instead of being applied only to domestic financial transactions, it can be expected that international requirements for the reliability, efficiency, and robustness of such IBORs will be strengthened. In Korea, the CD yield, which is IBOR, is applied to various financial transactions, mainly interest rate swap transactions, leading to excessive reliance on CD yield in the financial market. Although Korea has improved its CD yield calculation method, the structural problem of lack of actual transactions persists. Therefore, it is necessary to move away from excessive reliance on CD yield, starting with interest rate derivative transactions. In particular, given the large volume of interest rate swap transactions by foreign financial institutions using domestic CD yield as the reference rate, it will be necessary to change the reference rate of interest rate swap transactions to the KOFR to ensure international harmonization. This could be accomplished by reorganizing CD swap transactions to manage the risk of CD yield fluctuations associated with cash transactions, or by replacing the entire interest rate swap transaction with the KOFR. Cash transactions could consider expanding the application of the KOFR, starting with areas where it is expected to improve the relevance of benchmark rates and provide economic benefits to benchmark users. For bonds, the use of the in-arrears KOFR as a reference rate is economically beneficial to both investors and issuers, and should be actively promoted to revitalize the market. In Korea, unlike major countries, most lending rates include the unsecured financing risk of banks. As a result, basis risk on loans is systematically transferred from banks to retail borrowers in Korea. There is a need to improve the risk allocation between the banking sector and borrowers by allowing banks to manage basis risk for a portion of their loans, as in major economies. KOFR lending is expected to contribute to the efficiency and transparency of the domestic lending market. However, in order to reform the domestic benchmark rate, it is necessary to ensure that the KOFR and its underlying market, the RP market, are up to global standards. The KOFR is not immune to non-intrinsic volatility caused by technical factors. While the KOFR rate and its volatility should be closely reviewed in the future, volatility unrelated to the funding needs of financial institutions should be reduced. Efforts should also be made to develop the RP market, the underlying market for KOFR. It is important to ensure the robustness and stability of the RP market as the wider adoption of KOFR means that the impact of the RP market on the domestic economy and financial markets will increase. RP market participants and infrastructure organizations need to be mindful of the changed position of RP markets in the domestic financial markets and real economy. In addition, in the coming KOFR era, central banks will need to play an active role in ensuring the efficient functioning of RP markets and interest rate stability, given that RP markets are the starting point of monetary policy spillovers.

This study examines the financial challenges that may arise as Korea transitions to an aging economy and discusses institutional and policy responses for each of the major asset classes held by older households. Korea's aging population is progressing at a very rapid pace compared to other major developed countries, raising concerns about the financial challenges that may arise. In particular, the distribution of assets held by the average elderly household in Korea is characterized by a low share of financial assets and a large share of real estate assets, and within the financial asset class, the share of bank deposits is much higher than that of comparable advanced economies. This calls for a preemptive response to the sharp decline in consumption expenditures of elderly households after retirement, when labor income declines, which can lead to various economic and social problems. Among the economic problems expected to arise in an aging society, we focused on asset securitization to explore the role of financial investment businesses that can contribute to the financial stability of elderly households. Specifically, we divided the asset classes that account for the largest share of the average elderly household's asset holdings into real estate, financial investments, and business assets, analyzed the limitations of securitization and management for each class, and suggested improvements in the market- and institutional-level. Securitization of real estate through Korean Home Pension (주택연금) is expected to contribute significantly to improving the income replacement rate of elderly households after retirement. However, the current system faces problems of increasing participation rates and concentrating guarantee risks. Examining the cases of major advanced economies with developed reverse mortgage markets, we found that governments and public institutions are playing a role in market creation and guarantee, while private financial institutions are actively participating in providing various types of products to increase participation rates. In the United States, which currently has the largest reverse mortgage market, reverse mortgage-backed securities guaranteed by public agencies have played an important role in financing. In light of these examples, it is necessary to reduce the cost of the funding through securitization while encouraging the participation of private financial institutions to provide a variety of products and expand the range of participants to achieve sustainable growth of housing pensions. The use of fiduciary trust services should be considered to improve returns for older adults in managing their financial assets. The U.S. and Japan have established a regulatory framework for trust industry discipline that allows financial and non-financial institutions to participate and provide a wide range of products while ensuring that elderly participants can safely understand and enroll in products. In Korea, it is also necessary to flexibly regulate trust business licenses and business rules to provide a variety of products that meet the needs of the elderly, improve returns, and establish ground rules for conducting surveillance to protect financial consumers. With the advancement of the aging population, the issue of liquidating business assets for the retirement of older SME executives continues to be raised. In Japan and Germany, two major developed economies with a high proportion of family businesses, measures to revitalize SME M&A through counseling and financial support for SMEs and the participation of private equity funds are being discussed as countermeasures. In Korea, special laws should be enacted to revitalize SME M&As, and tax, financial, and procedural support should be provided to ensure sustainable utilization of business resources. Securitization of real estate assets, improved management efficiency of financial assets, and liquidation of business assets can lead to the inflow and development of capital markets. Based on this, we expect that the income structure of households will improve and stabilize, which will lead to a virtuous cycle in which surplus funds will flow back into the capital market.

This study aims to predict corporate failures in the Korean stock market. In particular, it seeks to design an effective early warning model that forecasts delisting prior to trading suspensions. To achieve this, the model incorporates not only quantitative data from the main financial statements, but also unstructured information from footnotes which has significantly increased in volume and importance since the adoption of K-IFRS. A machine learning methodology based on multimodal neural networks was employed to integrate these diverse data sources.   Amid growing economic uncertainties and the ongoing issue of corporate zombiefication, the insolvency prediction model proposed in this study offers valuable insights for both investors and financial authorities. By investigating the predictive power of footnotes information in identifying signs of insolvency, this study also offers a unique contribution to the field of academia. It examines whether accounting conservatism, the core accounting principle to disclose bad news in a timely manner, is adequately reflected in footnotes. In addition, based on extensive empirical analysis of current footnote disclosures, this study offers policy recommendations for enhancing the quality and effectiveness of footnote disclosures.   The empirical analysis draws on a dataset comprising 16,815 firm-year observations from non-financial industries with fiscal year-ends in December, listed on the KOSPI and KOSDAQ markets between 2005 and 2019. The model utilizes 43 quantitative indicators, including a firm’s marginal factors and external information, 37 major accounts, and all unstructured data contained in financial statement footnotes. Given the specific characteristics of the Korean market, where delisting due to insolvency is frequently preceded by prolonged trading suspensions, the model integrates solely on information available prior to the suspension.   The results demonstrate that the risk of delisting can be predicted with high accuracy before trading suspension occurs. This result is particularly meaningful as it would enable investors to incorporate insolvency risk at the time of investment decision making and not after. However, this high predictive accuracy is largely attributed to the model’s proficiency in correctly identifying firms with a relatively low risk of failure, suggesting the need for further refinement to improve its capacity to predict firms at high risk of insolvency.  Furthermore, the study found that the contribution of footnote information to predicting firms with a high likelihood of distress was limited. This finding calls for a re-evaluation of whether accounting conservatism is sufficiently incorporated in the preparation of footnote disclosures. To improve the usefulness of footnotes in predicting financial distress, it is essential to strengthen the linkage between the main body of financial statements and footnote information, as well as to enhance both the quantity and presentation of footnote disclosures. Footnotes should be concise yet comprehensive, and structured to facilitate comparability across time periods and between peer companies. Enhancing the quality of footnote disclosures, and by extension improving the balance of predictive models, remains a key area for future research.

According to the life-cycle hypothesis, elderly households use their wealth to sustain consumption as their income declines in retirement. They save during their working years and use up accumulated assets in old age, flattening the marginal utility of wealth over their lifetime. However, contrary to expectations, Korean elderly households are not fully depleting their assets, but rather continuing to work, reduce consumption, and maintain savings. This phenomenon is believed to be due to a combination of the lack of assets of elderly households, increased longevity risk due to longer life expectancy, and a household asset structure that makes it difficult to generate income in old age. This research report aims to comprehensively evaluate the consumption and asset adequacy of elderly households in Korea and suggest policy directions to improve the quality of life of the elderly and optimize domestic household assets. Using the National Survey of Tax and Benefit(NaSTaB) panel data, we analyze the consumption adequacy of Korean elderly households from 2008 to 2021 as follows. Comparing the consumption adequacy of elderly households estimated through the household expenditure function with the actual consumption expenditure, we found that elderly households have been significantly reducing their consumption, especially as they get older. All types of consumption are reduced, except for essentials such as housing and food, and medical expenses. The tendency to reduce consumption is closely linked to the income and wealth of older adults, with pension income, private transfer income, and financial assets being important moderating factors. The comparison between the adequacy of consumption and income of elderly households suggests that continuing economic activity is necessary to maintain a certain level of consumption adequacy. Next, we analyzed the asset adequacy of elderly households and found that while overall asset size has increased, there is still a disparity between households, with lower net worth households having insufficient assets to meet their consumption needs. In addition, most elderly households rely on real estate, especially residential assets, for a significant portion of their assets, and the share of financial assets is relatively small, making it difficult for them to generate cash flow. Also, most of their financial assets are concentrated in bank deposits rather than pension assets, which is unlikely to be sufficient to meet their retirement needs. Estimating the annuitized value of all assets held by elderly households, it is estimated that it is enough to cover one to two times the consumption level of the median household. These results suggest that it is imperative for elderly households to securitize their real assets. In order to improve the quality of life of elderly households and maintain stable consumption, it is necessary to revitalize the current housing pension system. It is necessary to analyze the reasons for the low participation rate of housing pensions and design a system that can be utilized by more elderly households by addressing the inconveniences faced by participants. Also, efforts should also be made to better allocate the financial assets of older households. As the elderly are generally riskaverse, it is necessary to increase the utilization of financial investment products that can generate stable returns. In addition, customized financial education should be expanded for the elderly who have a low level of understanding of financial investment products, and continuous education on digital finance and improved service quality should be provided to encourage efficient asset management. In addition, policy efforts should be made to help young and middle-aged people accumulate sufficient retirement assets. It is necessary to strengthen incentives for medium- and long-term asset-building products such as individual pensions and ISAs to encourage the working generation to accumulate enough retirement assets. In addition, policies need to be improved to streamline the management of retirement plan assets for the current working-age population. This will ensure a steady inflow of long-term capital into the capital market even as the aging process accelerates in the future. Furthermore, it will increase the marginal productivity of capital through effective allocation of household assets.

The future of South Korea is expected to be an era where one working-age individual supports one elderly person. Population aging will impact the economy in various ways, including changes in household asset ownership and composition. Classical economic theories suggest that elderly households rapidly deplete their assets. However, as observed in other countries, elderly households in Korea also tend to retain their assets. Distinguishing between age and generational effects is challenging when comparing different age groups in a given year. To address this limitation, we use empirical methods from existing literature to separately estimate the age and generational effects on household asset holdings in Korea. Our findings indicate that households are reluctant to deplete their assets, retaining 87% of their peak total asset value even beyond age 75. This behavior is primarily driven by a strong preference for real estate ownership, which delays asset depletion by reducing consumption. In contrast, capital market asset holdings begin to decline sharply from age 60, underscoring the role of the age effects in reducing household investment in capital market assets in Korea. A well-developed capital market with a strong foundation and increased trust is expected to foster greater participation from younger generations. However, we find no evidence of positive generational effects on the likelihood of capital market participation. These patterns appear to stem from the sustained contraction of the publicly offered fund market since the early 2010s. If the estimated patterns of the age and generational effects for household asset holdings persist, younger generations are unlikely to participate actively in the market. We project asset demands based on the estimated age and generational effects, along with projections of the number of households by age group of household heads. Total assets, net assets, real estate, and financial assets are expected to continue growing. However, the aggregate holdings of capital market assets by the household sector are projected to peak in 2034 and decline rapidly thereafter. While capital market participation rates by age group of household heads peak in their early 30s and decline thereafter, capital market asset holdings conditional on participation tend to increase with age, with only a modest declin among the elderly. This suggests that addressing the projected decline in aggregate capital market asset holdings requires expanding households’ participation across all age groups. Achieving this would necessitate sustained efforts, particularly ensuring that the capital market provides a sufficient risk premium. Essential initiatives to achieve this include fostering a shareholder-oriented corporate culture, improving corporate governance, and supporting the growth of innovative industries. Additionally, promoting a culture of stable investment in market indices rather than short-term momentum investments is crucial. Expanding incentives for tax-advantaged accounts, such as pension savings accounts and ISAs, would encourage younger generations to participate in the capital market. Policies should also support the elderly in maintaining their retirement accounts through annuitized withdrawals. These measures would help households sustain long-term participation in the capital market. Financial investment firms, including securities and asset management companies, should also provide tailored asset management services to small-scale investors.

As global warming leads to more frequent natural disasters and economic uncertainty, there has been a growing international voice to actively respond to climate change by reducing greenhouse gas (GHG) emissions. In line with international recommendations, the Korean government has set a nationally determined contribution (NDC) goal to reduce GHG emissions by at least 40% of 2018 levels by 2030. To achieve the NDC, the emissions trading system (ETS), which covers over three-quarters of GHG emissions, will play a key role. In addition, as the fourth plan period is scheduled to begin in 2030, it will be important for the emissions trading system to function smoothly based on market mechanisms for the next five years. We examined the current status and systems of emissions trading markets in major countries, including the EU ETS, California Cap & Trade, and the North American RGGI ETS. We found that, unlike Korea, the emissions trading market is relatively active based on the supply and demand mechanism. In the EU ETS, emission allowances are classified as financial investment instruments, and various participants, including financial institutions and other specialized investors, participate in the spot market. Furthermore, the futures market was opened in the early 2000s, and emission allowance futures are actively traded on more than 10 times larger scale than the spot market. In both the California Cap & Trade and the North American RGGI ETS, third parties, such as financial institutions, as well as ETS participating companies, are active participants in the emissions trading markets. The emission allowance futures markets also have proven to be highly efficient, with emissions price discovery, hedging, arbitrage, and other mechanisms to maintain the efficiency of the emissions market. As both the European and North American ETSs do not set a banking limit, there has been no persistent oversupply of emission allowances, and the quantity-based market stabilizer (EU MSR) and price-based stabilization mechanisms through auction market have been introduced and conducted, respectively. The Korean emissions trading market has been in a state of oversupply due to the high proportion of free allocations and banking restrictions. As a result, emission allowance prices have been declining since the second half of 2019, and despite the price decline due to a lack of participants, a lack of buyers and price volatility have been observed frequently. There has been a problem of trading concentration and price volatility at the time of emission allowance settlement, inconsistency between on-exchange and over-the-counter prices, and a rather high proportion of over-thecounter transactions. Comparing the system of the Korean emissions trading market with those of major countries, Korea has a supply-dominant market with a high proportion of free allocations and strict banking restrictions. In addition, participants in the emissions trading market are limited to allocated companies and market makers, and price stabilization measures are not effective, which exposes the secondary market to high price volatility. Also, Korea does not have an emission allowance brokerage firm and has not introduced futures or emissions ETP markets. Therefore, it is necessary to effectively improve the emissions trading system based on market mechanisms to achieve the 2030 NDC. First of all, the proportion of paid allowance allocation based on auctioning should be gradually increased, and market stabilization measures reserves that are managed outside the total allowance should be included in the total allowance. The banking restrictions should be abolished or significantly relaxed, and the scope of market participants in the spot and auction markets should be expanded to include financial institutions and pension funds. To revitalize the emissions trading market, it is necessary to improve the pricing mechanism of the emissions trading market by gradually expanding the number of heterogeneous participants with different objectives by introducing brokerage trading, futures, ETFs and ETNs. In addition, it is needed to introduce European-style quantity-based stabilization measures and U.S.-style price-based stabilization measures to stabilize the emissions trading market and establish discipline to minimize unfair trade in emissions allowances.