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보고서 1
Tightening Financial Conditions and Implications for the Housing Market in Korea [22-05]
Research Fellow Jung, Whayoung / Apr. 05, 2022
In the aftermath of the Covid-19 pandemic, housing prices have soared amid a rapid increase in household debt stemming from rising housing loans. This has raised concerns about financial imbalances in the housing market. In the meantime, as central banks of major economies normalize their monetary policy due to inflationary concerns, the housing market may be affected by the change in financial conditions. Against this backdrop, this article intends to examine the impact of tightening financial conditions on the housing market and present relevant implications.  

This article analyzes the effect of changes in interest rates and household loans on housing price growth. As shown in the analysis, an increase in the base rate contributes to reducing price rises across the housing market. Since the market responds to rate hikes gradually with time, however, household loans are likely to have a bigger impact on housing prices for the short term, compared to interest rates. In an analysis of upside and downside risks to housing prices, the upside risk has increased considerably since the pandemic, driven by a steep rise in household lending and upward price dynamics. In particular, the recent realized growth rate of housing price is close to the right tail (upside risk) of its conditional distribution, suggesting signs of overheating in the market. 

Considering the growing uncertainty of the housing market, as evidenced by a surge in the upside risk to housing prices, household loans need to be actively dealt with to curb rocketing housing prices in the short-term. In the long run, Bank of Korea’s policy stance to raise interest rates is expected to put downward pressure on housing prices. Considering the ripple effects of rate hikes, gradual normalization of stricter household loan regulations would be needed in the long-term.
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보고서 1
Impacts of tightening monetary policy on stock market in Korea [22-04]
Research Fellow Jang, Bosung / Mar. 30, 2022
As inflation spreads across a wide range of sectors, it seems quite difficult to mitigate the current inflationary pressure. Accordingly, Bank of Korea is expected to respond more strongly to inflation, leading to growing interest in the impacts on the stock market. Against this backdrop, this study identifies monetary policy shocks in terms of interest rates and M2 separately, and investigates how such shocks would affect stock prices.
 
In this article, impulse responses of stock prices are estimated for aggregate indices—the KOSPI and the KOSDAQ index, and industry portfolios. The results indicate that contractionary M2 shocks, rather than interest rate shocks, tend to have more significant effects on stock prices. In particular, falls in stock prices are pronounced in the KOSPI and IT, industrial materials, raw materials and consumer discretionary sectors. Furthermore, while stock prices exhibit a strong correlation with industrial production among macroeconomic and financial indicators, industries having stronger correlations with production are more susceptible to monetary policy shocks. This implies that business cycles serve as an important channel through which monetary policy influences stock prices, whose responses could vary depending on sensitivity to business cycles.
 
One additional takeaway is that, despite the contractionary impacts, stock prices recover in a short period of time. In other words, domestic monetary policy could have a short-term effect on stock prices to some extent, but it hardly would change their trends. Therefore, a desirable approach is to pay attention to developments of the real economy and manage related risks, rather than overreacting to monetary policy. 
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보고서 1
Government Sponsored Venture Capital Funds in Korea: Recent Trends and Policy Issues [22-03]
Research Fellow Nam, Chaewoo / Mar. 08, 2022
A government venture capital (GVC) fund refers to a fund of funds financed by the government. It aims to increase the supply of funding to sectors that are of public policy importance but are unlikely to receive sufficient funding from the market. Although each government department manages a number of GVC funds, there are growing concerns about inefficient public spending, primarily due to unreasonable target market setting and lack of a comprehensive administration system. As an essential precondition, the GVC scheme should minimize crowding out private venture capital funds while providing a pump primer to effectively nurture the relevant market. The government should adhere to this policy objective and place relevant constraints consistently during the entire GVC funds’ cycle including fund establishment-management-liquidation phases.   

When a GVC fund is newly set up, factors including the possibility of crowding out private VC funds, the attainability of policy goals and inefficiency stemming from overlapped investments should be fully taken into account. It is desirable to take a conservative approach to the establishment of a new GVC fund after examining the appropriateness of government-sponsored equity investment and the availability of other supporting policies. What is important in GVC fund management is to find a proper balance between non-financial policy objectives and the marketability of private venture funds. This requires the public fund of funds, which acts as a general partner (GP) exclusively responsible for GVC funds, to have investment capability and expertise. Although target markets and investment purposes of GVC funds vary depending on policies that each government department seeks to implement, it would be cost-effective to hinder the establishment of a separate GP for each fund if possible. A GVC fund’s dissolution needs to be distinguished from the liquidation of its GP. Also necessary is the privatization of the public fund of funds.      

The government-financed startups development policy has both benefits and drawbacks. However, it is also true that the GVC fund is one of the main drivers behind growth of Korea’s enterprises. It is high time that we should discuss how to improve Korea’s GVC scheme regarding the startups development policy that evolves from quantitative expansion to qualitative growth.        
 
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보고서 1
Securities Sector’s Financial Soundness in Korea Presented through Comparison with Foreign Regulatory Frameworks [22-01]
Senior Research Fellow Lee, Hyo Seob / Feb. 21, 2022
Although securities firms have played a pivotal role in the development of capital markets, in-depth research on financial soundness regulations that have the greatest impact on their business activities has rarely been undertaken. Since its first introduction to Korea in 1997, the previous Net Capital Ratio rule had been in place for about 20 years. In 2016, the financial authorities decided to adopt the new Net Capital Ratio approach (new NCR) with a view to enhancing global competitiveness and expanding risk investment capabilities. However, a systematic analysis of how the introduction of the new NCR has affected Korea’s securities sector has not been sufficiently conducted. In this regard, this report intends to take a look at financial soundness regulations on the securities industry in major economies like the US, Europe, and Japan, countries with a long history of the capital requirements regulation, and to examine changes that the adoption of the new NCR has brought about to Korea’s securities sector. In addition, it would analyze regulatory divergence between Korea and other advanced countries, aiming for presenting directions for regulatory improvement in the prudential framework to which Korea’s securities firms are subject.
   
As shown in the analysis of regulations on the securities sector’s financial health in major economies, the US NCR has evolved based on the philosophy of company liquidations-related liquidity requirements with a top priority of protecting customers’ assets in case of an insolvency event. The US introduced the NCR in 1934 when the Securities Exchange Act came into effect, and established the current capital requirement formula after undergoing several revisions such as the 1975 introduction of the Uniform Net Capital Role. The current NCR approach can be classified into three types: the basic method, the alternative method, and the alternative net capital method. European countries including the UK use a Basel-style approach that has emphasized the importance of preventing bankruptcies of securities firms under the regulatory philosophy of the going concern-based prudential framework. The previous Basel-based regulation on the securities sector is similar to the capital requirements to which commercial banks are subject. Europe is expected to significantly improve regulations on the securities industry’s financial soundness from the second half of 2021. This means that in practical terms, European countries would shift towards the US NCR approach.
 
Amid the worsening financial health of securities firms in the mid-1990s, Korea introduced the previous NCR rule in April 1997 by benchmarking Japan’s capital requirements framework. The previous NCR rule laid the foundation for the regulatory framework for the securities sector’s financial health, which helped securities firms overcome the 1997 Asian financial crisis and the 2008 global financial crisis. Since the new NCR was implemented in 2016, Korea’s securities industry has seen a sharp increase in equity capital amount, expanded into overseas markets, and considerably increased profitability in IB businesses. Given this performance, the new NCR appears to have achieved its policy objectives. On the other hand, some brokerage firms have seen a surge in the issuance of derivative-linked securities and the debt guarantee value over the same period, which increased prudential risks in some segments. Furthermore, small securities firms have suffered reduced investment capabilities and worsening profitability. This highlights that the impact that the new NCR approach had on the securities industry varied by size of firms.  
   
Additionally, this report undertook a comparative analysis of capital adequacy requirements for the securities sector in both Korea and major economies. The analysis reveals that in terms of calculating the capital adequacy ratio, the net operating capital, and gross risks, Korea’s regulatory regime is more stringent than those of other countries. Korea is not much different from its counterparts when it comes to the calculation of capital adequacy ratios. However, its regulatory scheme can be considered more rigorous given that Korea is applying a single capital adequacy ratio to brokerage firms regardless of their size. What is also notable is that it is hard to find any government around the world that has adopted a leverage ratio regulation as part of the prompt corrective action system. Against this backdrop, the introduction of the leverage ratio regulation to the securities sector appears to be a somewhat stringent regulatory measure.
The following suggestions should be taken into consideration to improve Korea’s regulatory framework with respect to the securities industry’s financial soundness. First, the financial authorities need to provide more flexibility to the application of capital adequacy ratios depending on the size and function of securities firms. For instance, it may be desirable to apply the Basel-style capital requirements to IB securities giants and to allow small- and medium-sized brokerage firms to choose between the net capital ratio and the Basel-based approach. Second, the net operating capital and gross risks should be calculated in proportion to economic risks. Third, it is necessary to keep to a minimum the use of capital requirements for achieving policy objectives. Lastly, in the long run, the leverage ratio system should be employed only to curb systemic risks. In this regard, the potential systemic risk of the securities sector needs to be assessed on a regular basis, and if the risk assessment shows that the risk level remains low, the regulatory threshold of leverage ratios should be reduced.  
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