Korea Capital Market Institute

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.  

The structure of the housing finance, which is shaped by institutional characteristics, the degree of financial market development, and housing finance policies of each country, holds significant implications from a macroeconomic perspective. In Korea, it has become crucial to establish a housing finance system that enhances macroeconomic stability as households’ interest in homeownership has significantly increased amid persistent concerns about excessive household debt. Examining the characteristics of housing finance systems in major countries reveals that housing finance systems have evolved in distinctly different forms, depending on the institutional characteristics, government policies, etc. Therefore, when referencing housing finance systems of other countries, it is essential to consider their institutional backgrounds and specific circumstances. Nevertheless, a common feature observed in major countries is that their housing finance systems are designed—or directed through government policies—to mitigate household exposure to interest rate risk by utilizing capital markets. The U.S. and Denmark supply long-term fixed-rate mortgage loans to households through Agency MBS and covered bonds, respectively, thereby transferring interest rate risk from households to capital market investors. Although mortgage markets in Canada and Japan are not predominantly centered around fixed-rate loans, these countries utilize public housing finance institutions to support the securitization of mortgage loans, making fixed-rate mortgage loans increasingly available to households. In many countries, the prevalence of variable-rate mortgage loans can be partially attributed to factors related to loan supply. When banks and other deposit-taking institutions dominate the mortgage market, their heavy reliance on deposit funding naturally incentivizes them to offer variable-rate loans to mitigate interest rate risk. However, excessive exposure of the household sector to interest rate risk can undermine macroeconomic stability, necessitating policy measures to manage households’ interest rate risk at an appropriate level. Considering the experience of major countries, leveraging capital markets is the most effective approach to expanding long-term fixed-rate mortgage loans, and the government needs to play a key role in driving this systemic change by implementing housing finance policies. Recently, financial authorities have been pushing to expand the share of mortgages with a fixed-rate term of five years or more, as variable-rate mortgages and hybrid mortgages do not sufficiently protect households from interest rate risk and may weaken macro-financial stability. This paper examines specific policy measures to expand the share of long-term fixed-rate mortgages in Korea including revitalization of the covered bond market and the institutionalization of mortgage banks. First, the covered bond market needs to be fostered to expand long-term fixed-rate mortgage lending in Korea. Some countries provide valuable insights into how covered bond markets can be effectively established. For instance, Denmark  has established a large-scale covered bond market centered on pass-through covered bonds, transferring prepayment risk to institutional investors. Canada and Australia, as non-euro, non-EU countries, have actively and efficiently utilized covered bonds, while Switzerland has successfully developed a large domestic currency-denominated covered bond market as a non-euro, non-EU country. In light of this, we propose the following six measures to foster a Korean covered bond market tailored to Korea’s specificities: (1) Developing both European and Korean covered bond markets as issuance markets simultaneously, (2) Establishing a domestic covered bond market focused on medium- to long-term bonds (5, 7, 10, and 15 years), (3) Developing the yield curve for Korean won-denominated covered bonds, (4) Adopting German (bullet) covered bonds, in parallel with Danish (pass-through) covered bonds, (5) Developing benchmark covered bonds while supporting non-benchmark covered bonds, (6) Managing the number of covered bond issuers. In addition, we propose to introduce mortgage banks and related schemes to foster more competition to expand long-term fixed-rate mortgages. It needs to move away from the current housing finance structure, which relies on banks to provide long-term fixed-rate mortgages. To this end, it is necessary to create an environment where mortgage banks play a key role in providing long-term fixed-rate mortgage loans, thereby fostering competition with the banking sector. This paper proposes enacting a strict Mortgage Bank Act, as is the case in Denmark, under which licensed mortgage banks would either utilize the Korea Housing Finance Corporation’s securitization program or directly issue covered bonds to raise funds. The cases of Denmark and the U.S. demonstrate that mortgage banks, which have established a specialized business model for long-term fixed-rate mortgage loans by leveraging fintech and long-term bond issuance (covered bonds or MBS), are able to successfully compete against traditional deposit-taking institutions in the housing finance market.  

The global foreign exchange (FX) market, the largest among global financial markets, has traditionally relied on major banks as primary liquidity providers. However, since the late 1990s, rapid advancements in FX trading infrastructure, spurred by the adoption of electronic trading technologies, have driven significant changes in market substructures. First, there has been a noticeable decline in interbank FX trading. Major banks are minimizing their FX position exposures by expanding dealer-to-customer netting or intrabank transactions, which has led to a reduction in the chain of transactions required to clear positions resulting from dealer-to-customer transactions. Second, the shift in liquidity providers within the FX market is accelerating. This change is primarily attributed to non-bank entities’ increased participation in interbank markets through prime brokerage services, as well as the growing role of principal trading firms (PTFs) specializing in algorithm-based FX trading. Third, the adoption of electronic trading systems has underscored the importance of the dealer-to-customer market. Major dealer banks’ proprietary electronic trading platforms, as well as the electronic trading system where multiple liquidity providers simultaneously offer bid prices, have stimulated both quantitative and qualitative growth in the dealer-to-customer market. Fourth, algorithmic trading has expanded rapidly in parallel with the proliferation of electronic trading systems. This enables global asset management companies or hedge funds to pursue strategies aimed at reducing transaction costs and minimizing market impact. These structural changes in the global FX market have generally brought about benefits, such as the cost reduction in back-office operations through trading automation, increased price competitiveness from a diversified participant base, and additional cost savings from the diversification of trading platforms and expanded algorithmic trading. However, these changes have also presented challenges in FX market data management, affecting liquidity estimation and the representation of price data. In contrast, Korea’s FX market lags significantly behind its global counterpart, primarily due to limited progress in FX market liberalization and substructure improvements. Notably, Korea is more than 20 years behind the global FX market in terms of the development and utilization of electronic trading systems. In response, the Korean government has recently undertaken various initiatives to advance the FX market, including enhancing market substructures by permitting dealer-to-customer electronic trading and implementing measures to further open the market to foreign financial institutions. To effectively narrow the gap between Korea’s FX market and the global FX market, it is worth considering the following measures. First, incentives are needed to encourage offshore financial institutions to actively participate in the Korean FX market. To this end, Korea should meet the requirements of overseas financial institutions by enhancing credit support for Registered Foreign Institutions (RFIs) and extending trading hours to ensure that global services for foreign customers contribute to increasing domestic interbank transactions. Second, it is crucial to encourage infrastructure development to alleviate the operational burden of after-hours trading associated with offshore market opening. The unique practice of allowing trading in the domestic market until 2 a.m. is not likely to serve as a sustainable long-term approach. Therefore, domestic banks should consider implementing automated trading systems through Application Program Interfaces (APIs) to support electronic solutions for night-time dealer activities. It is also recommended that domestic banks and financial institutions make continuous investments to benefit from the advancements in electronic trading systems. Third, it is worth considering expanding FX prime brokerage (PB) services to facilitate liquidity provision. Given the stagnation in interbank market trading volumes in Korea, diversifying market participants as liquidity providers through PB services could bring positive changes to the domestic FX market’s liquidity supply structure, while broadening and deepening the market. Fourth, after the growth of RFIs’ participation in the market becomes evident, infrastructure development should focus on enhancing the versatility of electronic trading systems for dealer-to-customer transactions. Based on the market conditions following liberalization, it is necessary to utilize Multi Bank Platforms (MBPs), which are commonly used in the global FX market, to develop a more integrated structure encompassing both wholesale and retail FX trading. Fifth, it is essential to establish a 24-hour trading system for the Korean won, which aligns with international practices. Once market liberalization achieves its objectives, such as increased trading volumes, the establishment of electronic trading systems, and improved market efficiency, Korea should pursue the integration of the Korean won into the global FX market’s 24-hour trading framework, thereby solidifying its position as a truly international currency.

This article examines the characteristics of special bonds in the Korean bond market and analyzes the surge in Korea Electric Power Corporation (KEPCO) bond issuance in 2022 to assess the impact of a rise in special bond issuance on the bond market. For special bonds, their credit ratings are primarily determined by the potential for government support rather than the issuer’s financial standing. Consequently, special bonds are typically issued with high credit ratings, resulting in lower yields compared to private sector bonds. In addition, they are exempt from the requirement to file a securities registration statement, which significantly streamlines the issuance process and allows for faster issuance compared to private sector bonds. In 2022, when KEPCO’s bond issuance surged, the company primarily relied on bond issuance to raise funds amid substantial operating losses, leveraging the feature of the Korean bond market where special bonds can be swiftly issued at lower borrowing costs. However, as the issuance volume rapidly rose, a serious supply-demand imbalance emerged, forcing KEPCO to issue bonds at higher rates. This, in turn, placed upward pressure on market interest rates and dampened investment demand for private sector bonds, which have relatively lower creditworthiness compared to special bonds. As the expansion of special bond issuance negatively affects private sector bonds, their issuance needs to be effectively and systematically managed. State-owned enterprises have a strong incentive to raise funds through the issuance of special bonds, due to their lower funding costs and simplified issuance process. However, their excessive issuance could disrupt the overall bond market in Korea. To mitigate this risk, it is necessary to ensure that special bond issuance remains at a level that does not adversely affect market stability, while also considering improvements to the issuance system. Meanwhile, starting in 2024, state-owned enterprises in energy sector will see a significant increase in bond maturities. Although these enterprises have moved out of operating losses, but their operating conditions have not improved sufficiently to repay the maturing special bonds. Thus, they need to prepare a refinancing plan that utilizes various borrowing instruments in a balanced manner so as not to affect the bond market.