[Yoon Administration 1 Year](16) Half-Measure Improvements in Capital Market System... Persistent Market Instability Factors

Confusion from Legoland Stabilizes... Slow Progress on Shareholder Rights Protection Bill
Need for Market Safeguards Against Financial Company Insolvency

The Yoon Seok-yeol administration launched with the national agenda of ‘activating venture capital through market innovation and enhancing investor confidence’ amid the capital market downturn caused by the Ukraine war and interest rate hikes. In its fifth month, the administration faced the Legoland crisis and introduced large-scale liquidity support measures, which are evaluated to have somewhat succeeded in stabilizing the unsettled capital market.

However, the achievements in institutional improvements aimed at creating a fair market ecosystem and activating venture capital, which were pledged promises, are considered somewhat insufficient. Market instability factors such as project financing (PF) defaults and corporate earnings deterioration still persist, leading to advice that efforts should be concentrated on maintaining or enhancing financial stability.

Although There Was a Slip-up... Crisis Response Measures Were Effective

[Image source=Yonhap News]

The Yoon administration was put to the test last October with the Legoland crisis. The government’s control tower function did not operate in a timely manner, exacerbating market confusion. Corporate bond issuance was blocked, and short-term funding market rates such as commercial paper (CP) soared. Project financing (PF) securitized bond rates approached 20%, and with refinancing also blocked, the capital market was on the brink of collapse. Government-guaranteed Korea Electric Power Corporation bonds (KEPCO bonds) rates rose to around 6-7%.

Despite the government’s missteps, fortunately, the temporary liquidity crunch did not lead to a catastrophe such as a chain default of companies or financial institutions. The Emergency Macro-Financial Meeting, composed of Deputy Prime Minister and Minister of Economy and Finance Choo Kyung-ho, the Governor of the Bank of Korea, the Chairman of the Financial Services Commission, and the Chairman of the Financial Supervisory Service, belatedly introduced market stabilization measures. The core content was to supply liquidity of ‘50 trillion won + α’ to the bond market and short-term financial markets.

The government’s measures proved effective. Interest rates in the bond market, including government bonds and KEPCO bonds, gradually stabilized downward. Some low-grade corporate bonds and PF asset-backed commercial paper (ABCP) rates also slowly declined. However, externally, banking crises in the U.S. and Europe and risks of alternative investment defaults continue to threaten financial market stability. Domestically, PF defaults and corporate earnings deterioration overlap, maintaining concerns about credit market instability.

Deputy Prime Minister and Minister of Economy and Finance Choo Kyung-ho, Bank of Korea Governor Lee Chang-yong, Financial Services Commission Chairman Kim Ju-hyun, and Financial Supervisory Service Governor Lee Bok-hyun are attending the Emergency Macroeconomic and Financial Meeting held at the Bankers' Hall in Myeong-dong, Jung-gu, Seoul on the 2nd. Photo by Kim Hyun-min kimhyun81@

A representative of a major domestic securities firm’s investment banking (IB) division evaluated, "Although there was one slip-up, the liquidity support measures that came out belatedly contributed significantly to market stabilization." He added, "There are still ticking time bombs threatening the market both domestically and internationally," and said, "Just as the U.S. and Europe quickly resolved specific banking crises to calm the market, the government’s swift response is required for additional emerging threats."

"Disappointing Pace of Capital Market Institutional Improvements"

Regarding capital market institutional improvements, the overall evaluation is predominantly ‘insufficient.’ During his candidacy, President Yoon stated, "When individuals engage in short selling, the system should be improved so they are not disadvantaged compared to institutions and foreigners," and "I will actively consider introducing a ‘short selling circuit breaker’ that automatically bans short selling when stock prices fall excessively." However, during the prolonged stock price decline phase, short selling was blocked, and there has been no noticeable progress in institutional improvements such as improving the fairness of short selling collateral ratios. Additionally, the pledge to abolish stock transfer tax has been indefinitely postponed. Deputy Prime Minister Choo stated, "It seems that investors and the market are not yet ready to accept it," indicating a perception that it is premature.

Legislation related to ‘strengthening minority shareholder rights’ is also stagnant. The Financial Services Commission (FSC) has been pursuing measures under its jurisdiction to revise the physical division system, delisting requirements, and strengthen insider trading regulations. The FSC introduced a series of institutional improvements last year to protect minority shareholders’ rights, including △ protecting minority shareholders’ rights of parent companies during physical division △ gradually promoting delisting to protect investors △ prior disclosure when insiders sell shares △ protecting minority shareholders during management rights changes through stock transfers, aiming to strengthen and protect the rights of minority shareholders who had been neglected in the capital market.

However, criticism arises that these efforts are ‘half measures’ as government ministries, including the FSC, have only pursued regulatory or enforcement ordinance revisions that they can implement independently. Legislative progress on amendments requiring National Assembly discussion, such as the Commercial Act or Capital Market Act, has not been properly made. Amendments to the Commercial Act emphasizing ‘proportional shareholder benefits’ have been proposed by Democratic Party lawmakers Lee Yong-woo and Park Joo-min. Minister of Justice Han Dong-hoon stated during last month’s parliamentary questioning, "Changing the director’s ‘duty of loyalty’ to ‘proportional shareholder benefits’ is somewhat revolutionary, but I agree with the basic direction," and added, "We will prepare a separate government proposal."

Senior Research Fellow Hwang Se-woon of the Korea Capital Market Institute pointed out, "The government has set a good direction for investor protection measures such as revising insider trading regulations, but the pace of institutional improvements is disappointing," and added, "It is also necessary to perfectly manage the soundness of financial companies, such as raising the loan loss provision ratio in preparation for financial company insolvencies in the second half of the year."

This content was produced with the assistance of AI translation services.