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Based on timely analysis on topics related to current issues that are of importance to economics and finance, our Survey Paper puts forward the implications as well as policy alternatives.
- Korea’s Potential Inclusion in the WGBI: Effects and Implications [23-02]
- Research Fellow Kim, Hansoo / Jan. 09, 2023
- The FTSE World Government Bond Index (WGBI) consisting of sovereign bonds issued by major economies is a leading index which is used as a benchmark index for major global pension funds. As a primary sovereign debt index, the WGBI contributes to inviting investment funds benchmarked against the index and enhancing the credibility of its member’s government bond market. A candidate country should fulfill various requirements including considerable market size, a stable institutional framework and convenience for international transactions.
Korea has recently been added to the FTSE Fixed Income Country Classification Watch List, which is considered a pre-WGBI inclusion stage. This is attributable to the Korean government’s active effort to address limited market accessibility that has served as an obstacle to Korea’s inclusion in the WGBI. Considering that Korea seems to meet all the criteria excluding restricted market access, FTSE Russell is likely to officially add Korea to the WGBI.
Korea’s WGBI membership is expected to attract more funds tracking the index and stabilize the sovereign debt market and FX market. This report finds that global economies newly added to the WGBI have experienced statistically significant effects including the increase in government bond prices and currency appreciation. The analysis of the domestic market predicts that the inclusion will have positive effects on government bond yields and exchange rates. While the influx of foreign investors is losing momentum, Korea’s joining the WGBI is expected to bring about economic benefits as it ensures a stable stream of funds to the sovereign bond market. Given that funds benchmarked against the WGBI tend to prefer long-term investments, WGBI membership is likely to further stabilize the domestic FX market and financial market.
Greater capital inflows resulting from WGBI inclusion should entail adverse effects of raising susceptibility to external factors, which requires caution. Notably, FTSE specifies conditions for the exclusion from the index and thus, failure in meeting relevant requirements could initiate the exclusion process. In this respect, Korea needs to consider expanding the domestic bond investor base and invigorating overseas stock investments as measures to mitigate external shocks while preparing for inclusion in the WGBI.
- Foreign Exchange Business of Korea’s Securities Firms: Current State and Implications [23-01]
- Senior Research Fellow JANG, GEUNHYUK and others / Jan. 02, 2023
- This report intends to explore how Korea’s securities firms currently conduct foreign exchange business and present improvements and challenges for reinforcing their FX business capability. Korean securities firms’ incompetence in the FX business may stem from a lack of their effort, but it is also attributable to limitations in the Foreign Exchange Transactions Act. Securities firms are restricted from securing foreign currency funds and are not permitted to remit or receive foreign currency. Foreign exchange trading (currency exchange) by securities firms is only allowed for investment purposes and opening an FX account is also limited.
This situation requires the Korean government to depart from the FX bank-centric concept deeply rooted in the Foreign Exchange Transactions Act and to encourage non-banking financial institutions such as securities firms to improve their FX business capabilities. Notably, when securities firms carry out typical FX services specified by the Financial Investment Services and Capital Markets Act, their FX business practices, such as currency exchange, account settlement and foreign currency remittance, are interconnected with each other. Accordingly, it should be noted that partial deregulation hardly helps non-banking institutions to comprehensively handle business practices. This implies sweeping deregulation will play a critical role in strengthening the capability of FX and global finance business across the financial services industry by enhancing the external soundness of non-banking financial institutions. Relaxed regulations are also crucial in increasing convenience in financial investment transactions and improving efficiency in financial intermediary services by reducing trading costs.
In this respect, Korean securities firms need to exert diversified and proactive efforts as follows. First, they should establish a comprehensive FX service system for cross-border investments including investment brokerage, foreign currency remittance and settlement, entrustment and custody of foreign currency securities, and FX hedging. Second, FX businesses of securities firms should evolve into a foreign currency transaction platform through an electronic business system to meet the growing demand for digital finance. Third, it is also necessary to overhaul the internal FX management system regarding monitoring and risk control.
- Stablecoins: Risks and Policy Challenges [22-28]
- Research Fellow Jang, Bosung / Dec. 29, 2022
- The collapse of Terra has called into question the stability of stablecoins. This crisis might be understated as an exception limited to the algorithmic stablecoin, an uncommon type. However, as various problems have erupted from fiat-collateralized stablecoins, concerns have been growing over internal and external risks. For instance, fiat-collateralized stablecoins could lead to a loss of confidence or invite a speculative attack due to inadequate management of reserve assets. A sharp price drop in non-stablecoins such as Bitcoin could put downward price pressure on the entire stablecoin market. Furthermore, distress in the stablecoin market could be passed onto the traditional financial market as well as the crypto market. There is also a possibility that the supply of stablecoins would come into conflict with monetary policy.
With potential risks from stablecoins in mind, major economies have drafted specific criteria and plans for permission, operation and oversight. The US and EU categorize crypto assets into stablecoins and non-stablecoins and seek to design policies for both categories. On the other hand, Korea’s policy discussions about crypto assets primarily center around non-stablecoins, which raises concerns about a regulatory gap in stablecoins. In preparation for the rapid growth of Korea’s stablecoin market, the government needs to promptly build the related institutional framework.
First of all, Korea should gear its policy direction toward inducing the issuance of fiat-collateralized stablecoins rather than other types. In addition, regulations of stablecoins should be differentiated depending on the scope of use to keep a balance between technical neutrality and financial stability. It is also necessary to support the redemption of stablecoins, not covered by deposit insurance, by applying the supervisory guideline for prepaid electronic money. To prevent conflicts with monetary policy, it is worth considering measures for large stablecoin issuers that impose stricter regulation on prudence or a limit on the total issuance volume.
- The Effect of a Rise in Property Prices on Household Assets and Liabilities and Its Implications [22-27]
- Research Fellow Jung, Whayoung / Dec. 26, 2022
- This article analyzes how property price rises have affected household assets and liabilities using household microdata. Over the past several years, households have accumulated wealth rapidly on the back of price hikes in real estate. But the pace of wealth growth has been uneven depending on the size of household wealth. High-net-worth households have accumulated wealth at a faster pace with a greater contribution of property price increases compared to household income. In Korea, high-net-worth households tend to own a larger share of their total assets in real estate. For that reason, a steep rise in property prices has a larger impact on wealthy households, thereby widening the wealth gap. In addition, the effect of property price rises on the household balance sheet has been heterogeneous across generations. Especially, financial liabilities held by households with heads aged 25-44, who have a relatively lower homeownership rate, have ballooned during the recent housing market boom.
From the perspective of economic mobility, wealth mobility is lower than income mobility. Accordingly, the wealth gap which has been widened due to the property price increases is likely to persist. Furthermore, the quality and composition of financial liabilities of households with heads aged 25-44 have deteriorated. The proportion of heavily indebted households in the group has increased more sharply. And the purpose of loans taken out has varied depending on their household wealth. To be specific, the share of loans for leasehold (jeonse) or security deposits has been increasing among households in their bottom 60% net worth segment, while the share of loans for residential housing purchases has been increasing overall among households in their top 40%.
It is noteworthy that households in Korea regard real estate as a primary means of wealth accumulation. In this regard, more policy attention should be paid to the distribution of wealth as well as housing stability. Also, thorough monitoring of developments and risk factors in the housing market is needed to prevent financial vulnerabilities from materializing.