Kang Tae Soo -- Riksbank Macroprudential Conference Stockholm, Sweden, November 2014 .... http://www.riksbank.se/en/Financial-stability/Macroprudential-Policy-Conference-November-2014/ Macroprudential Policy Conference, November 2014 Sveriges Riksbank and the International Monetary Fund are jointly hosting the conference Macroprudential Policy - Implementation and Interaction with other Policies in Stockholm on 13-14 November. The conference will bring together representatives of national authorities and international organizations to share their knowledge and experience in the evolving field of macroprudential policy. The financial crisis showed that ensuring the health of individual components of the financial system is not sufficient to guarantee overall financial stability. Macroprudential policy recognizes the importance of systemic risk and the need to develop regulations that address systemic risk and help to build resilience in the entire financial system.

1. Kang Tae Soo
at Riksbank Macroprudential
Conference
Stockholm, Sweden, November 2014
(a review of selected Kang Tae Soo Macroprudential presentations)

2. http://www.riksbank.se/en/Financial-stability/Macroprudential-
Policy-Conference-November-2014/Tae-Soo-Kang/

4. Contents
• Macroprudential Policies in Korea:
Toolkits and Experiences, April 14 2014,
New York
• Macroprudential Policy Framework: The
Case of Korea, IMF March 22~23, 2012,
Tokyo
• Macroprudential Policy Framework:
Framework: The Case of Korea, IMF,
March 1~2, 2012, Uruguay

5. www.riksbank.se/en/Financial-stability/Macroprudential-Policy-Conference-November-2014/

6. http://www.riksbank.se/en
/Financial-
stability/Macroprudential
-Policy-Conference-
November-2014/

7. www.riksbank.se/en/Financial-
stability/Macroprudential-
Policy-Conference-
November-2014/

8. www.adbi.org/files/2012.03.14.cpp.sess.b1.mccauley.risk.on.risk.off.pdf

11. Contents
• Macroprudential Policies in Korea:
Toolkits and Experiences, April 14
2014, New York
• Macroprudential Policy Framework: The
Case of Korea, IMF March 22~23, 2012,
Tokyo
• Macroprudential Policy Framework:
Framework: The Case of Korea, IMF,
March 1~2, 2012, Uruguay

12. http://www.paris-europlace.net/ny2014/RT3_Tae_Soo_Kang.pdf

13. Macroprudential Policies in Korea
- Toolkits and Experiences
Tae Soo Kang
Bank of Korea
Disclaimer
This presentation represents the views of the author and not
necessarily those of the BOK or BOK policy.
Paris Europlace Financial Forum
New York,April 14, 2014

14. Contents
Ⅰ. Monitoring and Measuring Macroprudential Conditions
Ⅱ. Macroprudential Toolkits
LTV, DTI Caps
FX-related
Loan to Deposit Cap
Ⅲ. Ongoing Discussions
2/25

15. I. Monitoring and Measuring Macroprudential Conditions
「Financial stability」 : New mandate to the BOK
(Bank of Korea Act amendments (Dec. 2011))
BOK concerns with macroprudential aspects
A framework for monitoring and measuring macroprudential conditions
3/25
Background
Financial Stability Report
Systemic Risk Assessment Model for Macroprudential Policy (SAMP)
1
2

16. I- Financial Stability Report
① Analyze and evaluate the potential systemic risk
② Provide early warning of risk
③ Suggest policy alternatives
Published twice a year, and submitted to the National Assembly
FSR attempts to …
4/25
1

17. Feedback mechanism with domestic and overseas advisor groups
5/25
Forthcoming FSR (April 2014) identifies five key risks
To help identify the potential risk factors, BOK conducts Survey of financial
market participants (90 experts) twice a year
① Tapering off of US quantitative easing (77%)
② Slowdowns in growth of China (72%)
③ Household debt problem (70%)
④ Financial instability in emerging market countries (57%)
⑤ Increase in corporate credit risk (41%)

18. Why
a Model
Needed?
BOK has developed its own systemic risk assessment model
Cannot manage what you cannot measure
InterconnectednessProcyclicality
Sources for Systemic Risk
2
Examine resilience of financial system (macro stress test)
Measure individual banks’ contributions to systemic risk (D-SIBs)
I- SAMP
Tail risks unobservable
⇒ For the 2013 FSAP for Korea, SAMP was used to conduct
macro stress test
6/25

19. Macro
shocks
1st round
loss
2nd round losses due
to default contagion
2nd round losses due
to liquidity contagion
⑤ Multi-period module
• Dynamic update of banks’ B/S
④Fundingliquiditycontagionmodule
• Estimation of funding costs and
deleveraging/liquidity withdrawals
• Contagious defaults due to liquidity
withdrawals
① Macro-risk factor module
• Generation of macro-economic
scenarios
③ Default contagion module
• Estimation of 2nd round losses due
to fire sales and credit crunch
• Contagious defaults due to
interbank loan losses
② Bank profit and loss module
• Calculation of bank profits and
losses based on macro scenarios
⑥Systemicriskmeasurementmodule
• Systemic risk indicators
- Value at Risk
- Expected shortfall
- Probability of systemic crisis
1st & 2nd round
losses
Chart: SAMP Structure
7/25

20. 8/25
Ⅱ. Macroprudential Toolkits
1 LTV, DTI Caps
FX-related
Loan to Deposit Cap
2
3

21. 9/25
II- LTV, DTI Caps
Background
Real estate in total assets : Korea 73.3% (March 2013)
Housing booms in early and mid 2000s fueled by rapid increases in home
mortgage lending by banks
Household Loans
1
Housing Booms and Bank Lending
Housing price

22. LTV Cap [September 2002]
LTV has been adjusted a total of 9 times
(6 times for tightening and 3 times for relaxing)
Limitation : Housing price → Collateral value
→ Affordable additional borrowing
→ Procyclicality amplified
10/25

23. DTI Cap [August 2005]
11/25
Curbs possible procyclical behaviour resulting from LTV Cap
Puts limit on ratio of annual debt repayment amount to debtor’s annual income
DTI ratio =
௔௡௡௨௔௟ ௥௘ௗ௘௠௣௧௜௢௡ ୀ
೘೚ೝ೟ೌ೒೐ ೗೚ೌ೙
೘ೌ೟ೠೝ೔೟೤
ା௜௡௧௘௥௘௦௧
௔௡௡௨௔௟ ௜௡௖௢௠௘
× 100
DTI has been adjusted a total of 8 times
(6 times for tightening and 2 times for relaxing)

24. ① Procyclical behavior could be reinforced
Unintended Consequence : LTV Cap
Boom phase: Mortgage collateral → Affordable additional borrowing
→ Countercyclical?
Downturn phase: LTV moves above threshold (violation of Cap)
→ Pressure on loan recovery → Housing price (fire sales)
→ Procyclicality amplified
Boom
LTV regulation :
Procyclicality worsening
12/25
LTV regulation :
Countercyclical ?
Downturn
Housing Price Cycle and the Role of LTV Cap

25. ② Caused Funding Liquidity Risk
13/25
Unintended Consequence : DTI Cap
Average maturity of mortgage loans : 5.4 years (2004) → 11.3 years (2013)
Banks’ funding maturity has not changed greatly
(Composition of banks’ funding (2013) : Deposit 67%, Wholesale funding 17%, Borrowing 16%)
Mortgage loan maturities
DTI ratio =
௠௢௥௧௔௚௘ ௟௢௔௡
࢓ࢇ࢚࢛࢘࢏࢚࢟
+ ݅݊‫ݐݏ݁ݎ݁ݐ‬
ܽ݊݊‫݈ܽݑ‬ ݅݊ܿ‫݁݉݋‬
DTI ratio =
௠௢௥௧௔௚௘ ௟௢௔௡
࢓ࢇ࢚࢛࢘࢏࢚࢟
+ ݅݊‫ݐݏ݁ݎ݁ݐ‬
ܽ݊݊‫݈ܽݑ‬ ݅݊ܿ‫݁݉݋‬
DTI caps designed in favor of
longer maturity

26. Pre- and Post-crisis Capital flows
14/25
II- FX-related Toolkits
Background
2
Capital Flow Volatility
Capital flows to Korea : Volatile and procyclical
About one half of total bank inflows during two-year period prior to Lehman
Crisis flowed out within five months after it
‘06.1 ~
‘08.8
‘08.9 ~
‘09.3
Equity -683.8 -65.7
Bond 516.4 -108.5
Bank borrowing 1,084.9 -571.5
(Short-term) (998.5) (-573.8)
(100 million dollars)
Capital inflows to Korea, and GDP Growth

27. Background
Notes: Currency mismatches = foreign liabilities – foreign assets
Maturity mismatches = short-term foreign liabilities – short-term foreign assets
A sharp increase in mismatch of short-term external debt through foreign
bank branches drives systemic risk
Domestic Banks Foreign Bank Branches
Currency and Maturity Mismatches
15/25

28. FX
Market
Pull factors
Major
Ship builders
Push factors
Foreign investors
Foreign financial
institutions
(1) Leverage caps on banks’ FX
Derivatives positions
(2) Macroprudential Stability Levy on
bank’s non-core FX liabilities
Volatility and mismatches in FX market can be understood
in terms of both pull and push factors
Pull factor Swollen hedging demand from major ship-builders amid
strong market expectations of currency appreciation
Push factor Capital inflows resumed from second half of 2009 on back
of ample global liquidity
16/25

29. S-T External
Debt
(1) Leverage caps [October 2010]
Aimed at curbing banks’ short-term external debt
Selling FX
Forward
Buying $ for
hedging
S-T $
Borrowing
Ship
Builders
Domestic
Banks
Foreign
Branches
Foreign
Bank
Branches
Overseas
Banks
Caps on banks’ FX derivatives positions : 150 % of equity capital for
foreign bank branches, 30 % for domestic banks
17/25

30. Aimed at curbing excessive increase in bank’s non-core liabilities
Lower levies applied to longer-maturity liabilities
Macroprudential Stability Levy
(2) Macroprudential Stability Levy [August 2011]
Bank borrowing and Business cycle
18/25

31. Leverage caps have contributed to reductions in currency and
maturity mismatches
Maturity Composition of External Debt
(Foreign bank branches)
Note : 1) Black and green vertical lines refer to the dates of the introduction of the Leverage Caps and the
Macroprudential Stability Levy, respectively.
(Domestic banks)
Effects of Leverage Caps
0
20
40
60
80
100
2009Q1 2010Q1 2011Q1 2012Q1 2013Q1
Short term Long term(%)
0
20
40
60
80
100
2009Q1 2010Q1 2011Q1 2012Q1 2013Q1
Short term Long term(%)
19/25

32. MSL has reduced arbitrage margin and raised FX funding costs
Total levy collected estimated to be as large as 12 % of net profits for
foreign bank branches (domestic banks : less than 1 %)
Note : 1) Interest differential (3M)-Swap rate (3M)
Arbitrage Transaction Incentives1)
(Foreign bank branches)
Ratios of Levy to Net Profits
(As of end-2012)
Note : 1) Estimated ratios
Effects of MSL
0.7
12.4
0
2
4
6
8
10
12
14
Domestic banks Foreign bank branches
(%)
20/25

33. II- Loan-to-Deposit Cap [December 2009]
Background
3
Textbook Case
Reality
(Boom period)
Funding
Lending
Lending opportunity
S-T Funding through
wholesale finance
Lending expansion based on
wholesale funding
Procyclicality
Interconnectedness
21/25

34. Loan-to-deposit ratio =
KRW-denominated Loans
KRW-denominated Deposits
≤ ૚૙૙%
⇒ With LTD ratio limited to within 100%, banks are forced to reduce
reliance on wholesale funding
Wholesale funding
22/25

35. Loan-to-Deposit ratio
Effects of LTD Cap
Reducing procylicality of bank lending behavior and
interconnectedness among financial institutions
23/25

36. III. Ongoing Discussions
24/25

37. The institutional framework for macroprudential policy
US type (FSOC) vs. UK type (BOE)
The recent recommendation by the IMF is noteworthy, that the
establishment of a financial stability committee is necessary and that
central bank should play a key role on it
Macroprudential vs. Capital Flow Management
Potential conflicts with the Capital Liberalisation
25/25

40. Contents
• Macroprudential Policies in Korea:
Toolkits and Experiences, April 14 2014,
New York
• Macroprudential Policy Framework:
The Case of Korea, IMF March 22~23,
2012, Tokyo
• Macroprudential Policy Framework:
Framework: The Case of Korea, IMF,
March 1~2, 2012, Uruguay

41. https://www.imf.org/external/oap/np/seminars/2012/macroprudential/pdf/IV2Kang.pdf

42. http://www.imf.org/external/oap/np/seminars/2012/macroprudential/

43. Monetary Policy Workshop on Strengthening
Macroprudential FrameworkMacroprudential Framework
held by IMF Regional Office for Asia and Pacific
(March 22~23, 2012, Tokyo)
MacroprudentialMacroprudential PolicyPolicy Framework:Framework:
The Case of KoreaThe Case of Korea
TaeTae SooSoo KangKang
Bank of KoreaBank of Korea
DISCLAIMER: This presentation represents the views of the author and not necessarily those of the BOK or BOK policy. The
views expressed herein should be attributed to the author and not to the BOK, its management or its Monetary Policy Committee.

44. DISCLAIMERDISCLAIMER
The views expressed in this presentationThe views expressed in this presentation
DISCLAIMERDISCLAIMER
The views expressed in this presentationThe views expressed in this presentation
represent those of the presenter and do notrepresent those of the presenter and do not
necessarily represent those of the Bank ofnecessarily represent those of the Bank ofnecessarily represent those of the Bank ofnecessarily represent those of the Bank of
Korea.Korea.
1

45. OutlineOutlineOutlineOutline
I.I. Potential Systemic Risks Unique to KoreaPotential Systemic Risks Unique to Korea
II.II. MacroprudentialMacroprudential Measures DeployedMeasures Deployed
1)1) M iM i d d thd d th1)1) MainMain rreasons we advanced these measureseasons we advanced these measures
2)2) Impacts of these measuresImpacts of these measures
III.III. Possible Obstacles to ImplementationPossible Obstacles to Implementation
-- Asymmetric impacts in addressingAsymmetric impacts in addressing procyclicalityprocyclicalityAsymmetric impacts in addressingAsymmetric impacts in addressing procyclicalityprocyclicality

46. I.I. Potential Systemic Risks Unique to KoreaPotential Systemic Risks Unique to Koreay qy q
C it l Fl V l tilitC it l Fl V l tilit1 Capital Flow VolatilityCapital Flow Volatility
2 Household DebtHousehold Debt
 Both factors affect systemic risk in terms of procyclicality.
 Implies Korean economy exposed more to systemic
risk in the time-varying dimension, than in the cross-
sectional dimension.
(B. Aydin, M. Kim and H. Moon: “Financial Linkages across Korean Banks”
1/14
( y g
IMF ,WP/11/201, 2011)

47.  In particular, strong procyclicality of capital flowsp , g p y y p
amplifying business cycle fluctuation is a systemic risk
factor common to emerging Asian countries
Capital Inflows to Asia & GDP Growth Capital Inflows to Korea & GDP Growth
35.0
40.0
12.0
14.0
Capital inflows/GDP(LHS)
(%) (%)
5.0
10.0
2 0
3.0
4.0
10 0
15.0
20.0
25.0
30.0
6.0
8.0
10.0
GDP growth (RHS)
10 0
-5.0
0.0
-2.0
-1.0
0.0
1.0
2.0
GDP Growth (RHS)
-5.0
0.0
5.0
10.0
0.0
2.0
4.0
01 02 03 04 05 06 07 08 09 10 11
-20.0
-15.0
-10.0
-6.0
-5.0
-4.0
-3.0
00 01 02 03 04 05 06 07 08 09 10 11
Net Capital Flow/GDP (LHS)
Source: BOK staff calculation
 (conjecture) Emerging Asian Economies may have high reliance
for credit supply on capital inflows in the form of externalfor credit supply on capital inflows in the form of external
liabilities, rather than on funding by domestic bank deposits.
2/14

48. 1 High Capital Flow VolatilityHigh Capital Flow Volatility1 High Capital Flow VolatilityHigh Capital Flow Volatility
Capital Flows Financial Market Volatilities (std. dev*)
250
Short-term debt
(billion dollars)
221.9 0 35140
A B
150
200
Short term debt
Bond
Equity
.9
101.6
0.25
0.30
0.35
100
120
140 Won/Dollar FX rate (LHS)
KOSPI (LHS)
Treasury Bond Yield (3Y, RHS)
C
0
50
100
97 11~98 3 98 4~08 8 08 9~08 12 09 1~11 6 11 7~11 12
0.10
0.15
0.20
40
60
80
A B
-100
-50
97.11~98.3 98.4~08.8 08.9~08.12 09.1~11.6 11.7~11.12
-21.4
-69.6
-12.6
0.00
0.05
0
20
97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12C
(Asian Crisis)
B
(Lehman Crisis) * 3-month moving averages
Source: BOK staff calculation
(EU Debt Crisis)
3/14

49. 2 Rapid Increase in Household DebtRapid Increase in Household Debt2 Rapid Increase in Household DebtRapid Increase in Household Debt
 High Level Household leverage at historic peak
 Floating Rates Almost 90% of mortgage loansg g g
Household Debt-to-Disposable Income Mortgage Loans, by Interest Rate Type1)
155%
Fixed Rate
10.1%
129%
Floating Rate
89.9%
2005 2006 2007 2008 2009 2010
Source : Bank of Korea
Sources : Bank of Korea, 9 major domestic banks
Note: 1) As of end-2011 4/14

50. II.II. MacroprudentialMacroprudential Measures DeployedMeasures Deployedpp p yp y
1 Responses to Capital Flow VolatilityResponses to Capital Flow Volatility
Capital Inflows Capital Outflows
International
Cooperation
 Ai d t t bili i h t t it l fl d t bli hi Aimed at stabilizing short-term capital flows and establishing
backstop (safeguard) against sudden capital outflows
5/14

51. 1) Main reasons we advanced these measures
 In open emerging markets, non-core liabilities take form of short-term
FX liabilities, increasing vulnerability to outbreak of crisis
 High capital flow volatility also causes interest and FX rate deviation
1) Main reasons we advanced these measures
 High capital flow volatility also causes interest and FX rate deviation
from economic fundamentals, thereby weakening monetary policy
transmission channel
Non-core Liabilities
of Korean Banks
Net FX Liabilities
(billion dollars) (%p)
Foreign Portfolio Investment and
Term Spread
(trillion won) (billion dollars)
1 0
2.0
3.0
7.0
12.0
Bond Investment
Equity Investment
Term Spread
(billion dollars) (%p)
A B
400
500
600
FX borrowing
Debt Securities
Others
(trillion won)
A 150
200
250
short-term liabiliies
long-term liabiliies
(billion dollars)
A B
-1.0
0.0
1.0
-3.0
2.0
A B
100
200
300
A: Lehman Crisis
B: EU Debt Crisis
B
50
100
150
Source: Shin & Shin (2010), updated by BOK staff
-2.0-8.0
08.1 08.7 09.1 09.7 10.1 10.7 11.1 11.7 12.1
0
100
05 06 07 08 09 10 11
6/14
0
05 06 07 08 09 10 11

52. 2) Impacts of these measures (in response to capital inflows)
 Effective so far
 Short-term External Debt Decreased
 Arbitrage Incentive Reduced Arbitrage Incentive Reduced
 Terms of Foreigners’ Bond Investment Lengthened
Foreign Bank Branches’Changes in External Debt before Foreigners’ BondForeign Bank Branches
Arbitrage Incentive
Changes in External Debt, before
and after ceilings
Foreigners Bond
Investment, before and after
taxation
1.5
Arbitrage incentives
Levy rate(short-term)
Moving Avg. of net arbitrage incentive
(%)
67 1100
150
200
(billion dollars)
7
9
short-term bond investment
long-term bond investment
(billion dollars)
Implementation
(Jan. 11)
0.5
1.0
g g g
Arbitrage incentive
Arbitrage incentive
60.4
171.867.1
-156.6-100
-50
0
50
100
short-term external debt
long-term external debt
1
3
5
0.0
Jan-11 Apr-11 Jul-11 Oct-11
before levy Arbitrage incentive
after levy
-200
-150
Before Ceiling
(Apr. 09~Dec. 10)
After Ceiling (Jan.
11~Nov.11)
-3
-1
09.1Q 3Q 10.1Q 3Q 11.1Q 3Q
Announcement
(Oct. 10)
Source: Bank of Korea 7/14

53. 2 Responses to Household DebtResponses to Household Debt
Caveat: more work needed to establish how
much of changes in house price and loan
growth attributable to macroprudential policy
Housing indicators (Seoul area) before and after loan regulation tightening1)
tightening
Mortgage loans2) House prices3) Housing transactions4)
1) Comparison between six-month periods before and after strengthening of loan regulations
2) In trillions of won 3) Apartment basis 4) In units of 10,000 * Source: Bank of Korea 8/14

54. III.III. Possible ObstaclesPossible Obstacles toto ImplementationImplementation
 Asymmetric impacts in addressing procyclicality
Countercyclical Buffers/ Dynamic Provisioning
pp
1 Countercyclical Buffers/ Dynamic Provisioning
Ceilings on LTD/DTI
Adjustments of Risk Weights on Specific Exposures
1
2
3 j g p p
More effective BoomMore effective
during Boom
Boom Downturn
Less effective
during Bust
Countercyclical policy Credit cycle before MAPP
Actual credit cycle after MAPP
9/14

55. 1 Countercyclical Buffer (CCB)Countercyclical Buffer (CCB)
 Boom: E+w A?
D bt b t ff ti i dit t l
1 Countercyclical Buffer (CCB)Countercyclical Buffer (CCB)
K: capital ratio
E: equity
• Doubts about effectiveness in credit control
• Despite regulators’ deployment of CCB,
banks still have incentive to increase more
profitable loans.
w: risk weight
A: asset value
• Impacts may be offset by time lag, or less
effective in periods of rapid credit expansion,
since banks given transition period up to 12
months to meet CCB targets.
?
Boom Downturn
B
 Bust: E+ w   A?
• Doubts about effectiveness in mitigating
deleveraging (slowing decrease in A)
Boom
• Under uncertainties about duration of financial
crisis, banks likely to opt to maintain their
capital buffer targets set during boom, out of
concerns that declines in their capital ratios
?
Countercyclical policy Credit cyclemight be interpreted as aggravated financial
soundness
10/14

56. 2 Ceilings on DTI/LTVCeilings on DTI/LTV2 Ceilings on DTI/LTVCeilings on DTI/LTV
BOOM BUST
?
Effective in limiting
excessive credit provision
by banks during economic
May be less effective in improving
liquidity conditions or supply of credit
 Despite eased LTV/DTI limits, banks
upturns likely to focus on cash hoarding rather
than lending
4,000
5,000
6,000
Tightening of LTV
Introduction of DTI
(Aug. 05)
Tightening of DTI
(Feb. 07)
Tightening of DTI
(Sep. 09)
(billion won )
Loosening of DTI
(Nov 08)
Loosening of DTI
(Aug. 10)
Mortgage Loan Fluctuations1)
1,000
2,000
3,000
4,000 g g
(Oct. 03)
(Nov. 08)
0
1,000
Jan-03 Jul-03 Jan-04 Jul-04 Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10
Source: Bank of Korea 11/14

57. Empirical Test on Determinants of Loan SizeEmpirical Test on Determinants of Loan Size
Dependent Variable: Household Loans (with income information)
2006
(Tighter DTI)
2007
(Tighter DTI)
2008
(Eased DTI)
2009
(Tighter DTI)
2010
(Eased DTI)
2011
(Tighter DTI)
Financial Variables
Log (collateral value) 0.705*** 0.622*** 0.653*** 0.782*** 0.687*** 0.621***
Income of Borrower 0.009*** 0.022*** -0.003*** 0.010*** 0.014*** 0.011***co e o o o e 0.009 0.022 0.003 0.010 0.014 0.011
Interest Rate (CD yield)1) -0.072*** -0.029*** -0.095*** -0.136*** -0.043*** 0.072***
High Credit2) dummy 0.082*** 0.038*** -0.059*** 0.089*** 0.046*** 0.048***
Gangnam3) dummy 0.045*** 0.075*** 0.171*** 0.003*** 0.088*** 0.111***
Non-financial Variables
Interest Only Payment4) dummy -0.164*** -0.043*** 0.059*** 0.118*** 0.101*** 0.006***
Group Loan dummy 0 019*** 0 017*** 0 035*** 0 089*** 0 083*** 0 007***Group Loan dummy -0.019 0.017 0.035 0.089 0.083 -0.007
Business Owner5) dummy 0.023*** 0.024*** 0.026*** 0.042*** 0.034*** 0.029***
Maturity 0.025*** 0.021*** 0.015*** 0.015*** 0.020*** 0.023***
Regulatory Variables
LTV dummy -0.093*** -0.046*** 0.004*** -0.102*** -0.031*** -0.116***
DTI dummy -0.051*** -0.096*** -0.066*** -0.046*** -0.008*** -0.019***
CConstant 2.431*** 2.858*** 3.110*** 1.230*** 1.963*** 2.583***
Adj. R2 : 0.364
Obs. : 48,016
Adj. R2 : 0.308
Obs. : 35,530
Adj. R2 : 0.295
Obs. : 55,698
Adj. R2 : 0.332
Obs. : 71,545
Adj. R2 : 0.292
Obs. : 72,481
Adj. R2 : 0.282
Obs. : 40,985
 Analysis shows LTV/DTI to have asymmetric policy impacts:
regulation tightening more effective than regulation easing
12/14

58. 3 Adjustment of Risk Weights on Specific Exposures (ARW)Adjustment of Risk Weights on Specific Exposures (ARW)3 Adjustment of Risk Weights on Specific Exposures (ARW)Adjustment of Risk Weights on Specific Exposures (ARW)
<Operating Mechanism of ARW>
Increase in credit risk in a particular asset, AiIncrease in credit risk in a particular asset, Ai
Operating Mechanism of ARW
Upward adjustment of risk weights for loans to the asset (wi)Upward adjustment of risk weights for loans to the asset (wi)
Increase in capital requirements (K)Increase in capital requirements (K)
Incentive to reduce exposure to the asset (Ai)Incentive to reduce exposure to the asset (Ai)
13/14

59. <Banks’ Responses in Unintended Direction>p
: Regulator’s action and intended
direction of banks’ response
: Banks’ responses in reality
Excessive concentration on a particular asset, AiExcessive concentration on a particular asset, Ai
: Banks responses in reality
Upward adjustment of risk weights for loans to the asset (wi), and
resultant tightened capital requirement (K)
Upward adjustment of risk weights for loans to the asset (wi), and
resultant tightened capital requirement (K)g p q ( )g p q ( )
Banks’ Reponses
R it li i (E )
Banks’ Reponses
R it li i (E )1 Recapitalizing (E )
Reducing other assets(Aj ) with lower risk weights and returns
Recapitalizing (E )
Reducing other assets(Aj ) with lower risk weights and returns
According to UK FSA (2009),
1
2
According to UK FSA (2009),
ARW (wi)  E 50%, exposure to other assets  25%
exposure to targeted asset  25%
14/14

61. Contents
• Macroprudential Policies in Korea:
Toolkits and Experiences, April 14 2014,
New York
• Macroprudential Policy Framework: The
Case of Korea, IMF March 22~23, 2012,
Tokyo
• Macroprudential Policy Framework:
Framework: The Case of Korea, IMF,
March 1~2, 2012, Uruguay

63. https://www.imf.org/external/np/seminars/eng/2012/
macro/pdf/kang.pdf
http://www.bcu.gub.uy/Paginas/Default.aspx

64. Macroprudential Policy Framework:
The Case of Korea
Tae Soo Kang
Financial Stability Department
Bank of Korea
High-Level Seminar on Macroprudential
Policies to Achieve Financial Stability
Held by Banco Central Del Uruguay and IMF
(Punta del Este, Uruguay, March 1–2, 2012)

65.  IMF Stylized 3 Types of Models for MPF:
Full Integration, Partial Integration and Separation
 No Single Universal Solution:
No sole “Best Practice” for addressing Unique
Systemic Risks in all Countries
“A cat’s color (MPF) does not matter, black or white,
as long as it can catch mice (Systemic Risk).” (Deng
Xiaoping, 1978)

66. Outline
I. What are the Potential Systemic Risks
Unique to Korea?
II. Macroprudential Policy Responses
III. Macroprudential Policy Framework in Korea:
Institutional Arrangements
1/23

67. I. What are the Potential Systemic
Risks Unique to Korea?
 More exposed to Systemic Risk in a Time-varying
Dimension, entailed by Procyclicality, than in a Cross-
sectional Dimension
• Empirical Evidence: “Financial Linkages across Korean Banks,”
IMF-BOK Joint Research, 2011. WP/11/201)
 Procyclicaity emanating from Volatile Capital Flows
and Build-up of Household Debt may result in
heightened Systemic Risk in Korea.
2/23

68. 3/23
 In particular, Strong Procyclicality of Capital
Flows Amplifies Business Cycle Fluctuation
Capital Inflows to Asia & GDP Growth
Source: BOK staff Calculation
Capital Inflows to Korea & GDP Growth
-5.0
0.0
5.0
10.0
15.0
20.0
25.0
30.0
35.0
40.0
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
01 02 03 04 05 06 07 08 09 10 11
Capital inflows/GDP(LHS)
GDP growth (RHS)
(%) (%)
-20.0
-15.0
-10.0
-5.0
0.0
5.0
10.0
-6.0
-5.0
-4.0
-3.0
-2.0
-1.0
0.0
1.0
2.0
3.0
4.0
00 01 02 03 04 05 06 07 08 09 10 11
GDP Growth (RHS)
Net Capital Flow/GDP (LHS)

69. A
(Asian Crisis)
B
(Lehman Crisis)
Capital Flows
A B
Financial Market Volatilities (std. dev*)
* 3-month moving averages
1 High Capital Flow Volatility
4/23
-100
-50
0
50
100
150
200
250
97.11~98.3 98.4~08.8 08.9~08.12 09.1~11.6 11.7~11.12
Short-term debt
Bond
Equity
(Billion dollars)
-21.4
-69.6
221.9
101.6
-12.6
0.00
0.05
0.10
0.15
0.20
0.25
0.30
0.35
0
20
40
60
80
100
120
140
97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12
Won/Dollar FX rate (LHS)
KOSPI (LHS)
Treasury Bond Yield (3Y, RHS)
Source: BOK staff calculation
C
(EU Debt Crisis)
C

70.  Speculators’ Arbitrage-Seeking Behavior in
Volatile Markets may Aggravate Volatility.
“Most traders…don’t really care that much how they [world
leaders] are going to fix the economy, how they are going to fix
the whole situation – our job is to make money from it….
Personally I’ve been dreaming of this moment for three years. I
have a confession, which is I go to bed every night and I dream
of another recession.” (Interview with 34-year-old Trader, AFP,
September 29, 2011)
5/23

71.  Interaction between Global (push) Factors
and Regional (pull) Factors
Source: IMF(2011)
Cyclical Factors Structural Factors
Push
Factors
Global liquidity
Global risk appetite
Slowing growth ofAEs
Diversified capital flows
Advanced countries’
weakened fiscal structures
Pull Factors Interest rate
differentials
Fast recovery of EMEs
High potential growth
Fiscal soundness
Capitalmarketdevelopment
6/23

72.  High level⇒ Household Leverage at historic peak
2 Build-up of Household Debt: Fault Lines
 Variable Rate⇒ More than 92% of Mortgage Loans
Household debt-to-
disposable income
2005 2006 2007 2008 2009 2010
155%
129%
 Interest only paid, No Principal (78.4%)
Source : Bank of Korea
Mortgage Loans,
by Interest Rate Type1)
Note: 1) As of end-June 2011
Mortgage Loans, by
Repayment Type
Source: Seoul metropolitan
area home mortgage loan
data of 4 major banks
Installment Repayment
Loans on which principal
currently being repaid, Installment
Repayment
Loans currently
in grace period,
41.1%Bullet Repayment
Loans, 37.3%
Source : Bank of Korea
Mixed Rate
2.4%
Fixed Rate
4.9%
Floating
Rate
92.7%
7/23

73.  Background of Household Debt Increase since 2002
• Housing Price Bubble
• Banks seeking alternative customers, i.e. Households,
in response to decline in demand from Corporate
Sector
• Competition among Banks
• Most recently, increase in household loans for other
purposes (e.g. securing living expenses, funding SOHO
business, smoothing consumption, etc.) rather than home
purchases
• Low interest rates since recent global financial crisis
8/23

74. 1 High Capital Flow Volatility
-3.0
-1.0
1.0
3.0
5.0
7.0
9.0
short-term bond investment
long-term bond investment
(Billion dollars)
Implementation (Jan. 11)
Announcement (Oct. 10)
0
10
20
30
40
50
60
70
80
90
09.1Q 3Q
domestic banks
foreign bank branches
(Billion dollars)
Announcement (Jun. 10) Ceiling cut (Jul.11)
Implementation (Oct. 10)
Foreign Bank Branches’
Arbitrage Incentives
Currency Mismatches of FX Banks Foreigners’ Investment in
Bonds
II. Macroprudential Policy Responses
( Policy Responses for Capital Inflows )
9/23
0.0
0.5
1.0
1.5
Jan-11 Apr-11 Jul-11 Oct-11
Arbitrage incentives
Levy rate(short-term)
Moving Avg. of net arbitrage incentive
(%)
Arbitrage incentives
before levy Arbitrage incentives
after levy

75. ( Policy Responses for Capital Outflows )
Strengthening of Financial Cooperation:
Backstop against sudden Capital Flow Reversal
• Expansion of Currency Swaps with other central banks (FRB, BOJ, PBC)
• BOK initiated international discussion on G20 Global Financial
Safety Net (GFSN) in 2010, and contributed to launch of CMIM in
March 2010
Korea’s Policy Responses to Capital Flow Volatility
10/23
Period of capital inflows
(Q2 2009~Q2 2011)
Periods of capital outflows
(Q42008~Q12009,Q32011~Q42011)
Conventional
 Currency appreciation
 Increases in foreign reserves
 Currency depreciation
 Decreases in foreign reserves
Unconventional
 Macroprudential Policy
- Ceilings on FX derivative positions
- Macroprudential Stability Levy
 Currency Swaps (FRB in 2008, BOJ
and PBC in 2008 and 2011)
 Strengthening of GFSN

76.  These policies differ from Capital Controls, which
differentiate between Residents and Non-residents.
• Price regulations : Macroprudential Stability Levy, imposition of reserve
requirements on foreign currency deposits, etc.
• Quantitative regulations : ceilings on FX position and investment in foreign
currency-denominated assets, regulation of foreign currency loans, etc.
 Some Asian EMEs used Capital Controls.
e.g. Prohibition of investment in time deposits with maturities less than 1-year*
(Taiwan, Nov 2009); Restrictions on investment in government bonds and
MMFs* (Taiwan, Nov 2010); Hike in ratio of reserve requirements on non-
residents’ deposits* (Taiwan, Nov 2010)
11/23

77. Housing indicators (Seoul area) before and after loan regulation tightening1)
1) Comparison between six-month periods before and after strengthening of loan regulations
2) In trillions of won 3) Apartment basis 4) In units of 10,000 * Source: Bank of Korea
Seemingly effective, but more work needed to
establish how much of changes in house price
and loan growth attributable to macroprudential
policy tightening
Mortgage loans2) House prices3) Housing transactions4)
12/26
2 Build-up of Household Debt

78. Effective
Institutional
Arrangements
for
MPF
13/26
III. Macroprudential Policy Framework (MPF)
in Korea: Institutional Arrangements
Successful Systemic
Risk Identification
Timely Use of
Policy Tools
Coordination +
Autonomy across
Policy Functions
1
2
3

79. 14/26
Financial Stability Policy Framework in Korea
Ex-ante
Macroprudential Policy
Microprudential Policy
Crisis Management
 Financial Services Commission (FSC)
 Financial Supervisory Service (FSS)
 Bank of Korea
 Financial Services Commission (FSC)
 Financial Supervisory Service (FSS)
 BOK: Lender of Last Resort
 Korea Deposit Insurance
Corp. (KDIC): Deposit
Insurance and Resolution of FIs
 Ministry of Strategy &
Finance (MOSF): FX Policies
and Bail-out
Ex-post

80. Policy Coordination among Separate Authorities
 “There is no「e pluribus unum」.”
• No formal Organization/Committee dedicated to
Macroprudential Policy
 Some Policy Coordination Channels
• Policy Coordination through FSC Meetings:
High-level officials of relevant authorities (BOK, FSS, MOSF and
KDIC) participating as ex officio members
• Various Channels for Information Sharing and
Policy Coordination:
e.g. FX Market Stabilization Council, Economic and Financial
Advisory Council, National Economic Advisory Council, etc.
MPF in Korea: Separation (Model 6)
15/26

81. 16/26
Limitations of Informal Policy Coordination
 No Binding Effects of Agreement on Policy
 Difficult to identify Agency Accountable for Policy
Responses to Common Systemic Risk
 Rivalry or Turf Issues impeding Free Flow of
Information
MPF in Korea: Separation (Model 6)

82. • Central Bank raises Policy Rate (July 2010)
• Supervisor eases DTI regulation (August 2010)
 Counteractive Outcome
1 Counteractive or Push-Me, Pull-You Outcomes
 Push-me, pull-you outcome
Lack of Policy Coordination
• Supervisor deploys 「Countercyclical Capital Buffer」
• Central Bank raises Policy Rate
17/26

83. Cycle Boom Downturn
Macro-
Authority
Credit expansion
⇒ Systemic risk
⇒ Buffer deployed
Credit contraction
⇒ Systemic risk
⇒ Buffer released
Micro-
Authority
-No worry (no mandate for
systemic risk)
-Concern about lowering of FI profitability
by limiting of asset allocation
-Unease. (Why? Lowering of capital
when most needed)
-Concern about negative signaling
effect
Boom Downturn Boom
Countercyclical policy Credit cycle
2 Potential Tensions Between
Micro- and Macroprudential Supervisors
18/26

84. Build-up of
Common Risks
(Interconnectivity)
Need to Respond
with Macroprudential Policy Tools?
Microprudential
Supervisor
Everything OK
in terms of Individual FI
Health
3 Potential Tensions Between
Micro- and Macroprudential Supervisors
Macroprudential
Supervisor
Concerned about
Interconnectivity
19/23
Coordination Failure

85. CCB Deployed?
Who should own the Tool?
Central Bank
More Focus on Business
Cycle/GDP
Coordination Failure
 Microprudential Supervisor may mechanically deploy CCB when credit-to-
GDP ratio rises above its long-term average.
 However, Central Bank may tolerate build-up of credit exposures stemming
from increase in money demand for investment entailed by improved
productivity.
Microprudential
Supervisor
More Focus on Credit Cycle
and Individual FI Health
4 Potential Tensions Between
Microprudential Supervisors and Central Bank
Build-up of
Credit Exposures
20/23

86. 0
1,000
2,000
3,000
4,000
5,000
6,000
Jan-03 Jul-03 Jan-04 Jul-04 Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10
Tightening of LTV
(Oct. 03)
Introduction of DTI
(Aug. 05)
Tightening of DTI
(Feb. 07)
Tightening of DTI
(Sep. 09)
( Billion Korean won )
5 Macroprudential Policy Effect Offset: Bounce Back
Mortgage Loan Fluctuations1)
 Importance of Communication between Supervisory and Monetary
Authorities
 Is Regulation effective under Low Interest Rates + Ample Liquidity?
⇒ Continued risk-taking (returning to mortgage loans)
⇒ Macroprudential policy effects possibly offset, due to monetary
policy stance in opposite direction, and vice versa
21/23
Failure of policy
coordination (Jul. 10)

87. Central Bank
Government
Supervisors
Application of
Macroprudential
Tools
Application of
Microprudential ToolsNo Blessing
Systemic Risk?
Shock
Consultation
Way Forward for Separate Framework:
Policy Coordination
22/23
Blessing

88. Rebuilding Financial Stability Framework:
Amendment of BOK Act (31 Aug, 2011)
23/23
Greater Role in Responding to Systemic Risk
Greater Accountability for Financial Stability
Semiannual Report on Financial Stability (FSR) to National Assembly
Enhanced Access to Microprudential Data
Amended Act mandates BOK Access to B/S
info of both Banks and Non-Bank FIs
MOU with FSS allowing BOK to Access
Wider Range of Microprudential Data
Financial Stability Mandate Re-introduced
Assessment of Systemic Risk a starting point of Financial Stability Policy Framework

90. Bibliography
 Angelini, Paolo, Stefano Neri and Fabio Panetta (2011): “ Monetary and macroprudential
policies,” Banca d’Italia working paper.
 Bini Smaghi, Lorenzo. (2011): “Macro-prudential supervision and monetary policy—
linkages and demarcation lines” Speech at OeNB annual economic conference, May.
 Borio, C. and M. Drehmann (2009): “Towards an operational framework for financial
stability”, BIS working papers No. 284, June.
 Caruana, J. (2010): “Macroprudential policy: working towards a new consensus”,
remarks at high-level meeting organized by BIS FSI and IMF Institute, April.
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Macroprudential Approach”, policy research working paper No. 5505, The World Bank,
December.
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Housing Policy,” held in Seoul, December 12~13.
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“Policies for Macrofinancial Stability: Options to Deal with Real Estate Booms,” IMF
Staff Discussion Note, SDN/11/02, February 25.
 Group of Thirty (2010): “Enhancing Financial Stability and Resilience”, October.
 Igan, D. and H. Kang (2011): “Loan-to-Value and Debt-to-Income Limits as
Macroprudential Tools: Evidence from Korea,” paper presented at BOK-IMF Workshop
on “Managing Real Estate Booms and Busts,” held in Seoul, April 11~12.

91. Bibliography
 IMF (2011): “Towards Effective Macroprudential Policy Frameworks—An Assessment
of Stylized Institutional Models”
 Kang, Taesoo and Guonan Ma (2009): “ Credit Card Lending Distress in Korea in 2003”,
BIS paper No. 46.
 Moreno, R. (2011): “Policymaking from a “macroprudential” perspective in emerging
market economies”, January.
 Nier, Erlend W., Jacek Osiński, Luis I. Jácome, and Pamela Madrid (2011):
“Institutional Models for Macroprudential Policy,” IMF Staff Discussion Note,
SDN/11/18, November 1.
 Squam Lake Working Group on Financial Regulation (2009): “A Systemic Regulator For
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speech at BOK-BIS Conference held in Seoul, January 2010.
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remarks at Conference on Macroprudential Policies held in Shanghai, China, October.
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Framework For Korea”, Journal of Money and Finance, Vol. 24, No.2, June.

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