Lee Changyong: "Legal and Institutional Frameworks Must Be Strengthened to Enhance the Bank of Korea's Macroprudential Role"

Lack of Macroprudential Policy Tools and Micro-Supervisory Authority
Concerns Raised Over Potential Delays and Reduced Effectiveness in Policy Response

Lee Changyong, Governor of the Bank of Korea, has once again emphasized the need to strengthen the legal and institutional frameworks to enhance the Bank of Korea's macroprudential policy tools.

Lee Changyong, Governor of the Bank of Korea. Photo by Joint Press Corps

On July 16, at the Bank of Korea in Jung-gu, Seoul, Governor Lee delivered a keynote speech at a conference co-hosted with the Asian Development Bank (ADB) and the Journal of International Money and Finance (JIMF) under the theme of "Fiscal and Monetary Policies in Developing and Emerging Economies for Inclusive Growth." He stated, "Unlike major economies, the Bank of Korea does not have direct macroprudential policy tools or micro-supervisory authority. If there are disagreements with the government regarding the intensity or direction of policies during the coordination process, there are concerns that the speed and effectiveness of policy responses may be compromised."

In his keynote speech titled "The Bank of Korea's Monetary Policy Experience and Lessons After the Pandemic," Governor Lee referred to the experience in August last year, during a period of monetary policy transition, when the Bank responded to a deepening financial imbalance through a combination of monetary policy and macroprudential policy. At that time, as expectations of a policy shift by the US Federal Reserve spread, domestic market interest rates fell sharply in advance, leading to an easing of financial conditions and a rapid rise in Seoul housing prices, which surged at an annual rate of up to 20%. Household loans increased by nearly 10 trillion won per month during this period.

Governor Lee said, "In such a situation, there were concerns that if the Bank of Korea were to shift the direction of monetary policy, it could further fuel the rise in real estate prices and the expansion of financial imbalances." He explained, "Therefore, we first proposed to the government to strengthen macroprudential policy, and after confirming the effects of those policies, judged that it would be appropriate to adjust monetary policy." He noted that in Korea, the household debt-to-GDP ratio is already high at about 90%, which is enough to constrain consumption, and that the share of real estate in household and financial institution assets is higher than in major economies. He added, "The concentration of credit in the low-productivity real estate sector can also weaken growth potential, so it was necessary to appropriately mitigate this," outlining the background for holding the base rate steady in August last year.

In particular, Governor Lee pointed out, "Unlike major advanced economies, the Bank of Korea does not have its own macroprudential policy tools to directly respond to financial imbalances, so we proposed strengthening related regulations through policy consultations with the government." As a result, at that time, the government implemented measures such as expanding the scope and tightening the intensity of the DSR (Debt Service Ratio) regulation. He stated, "Thanks to the Bank of Korea's rate freeze in August and the government's strengthening of macroprudential policy, the upward trend in Seoul housing prices and the increase in household loans began to slow from September onward," emphasizing, "It is necessary to maintain a strong macroprudential policy stance during periods of interest rate cuts."

Previously, at a press conference following the monetary policy decision meeting on July 10, Governor Lee also stressed, "The fact that household debt has not decreased even once in over 20 years, and the emergence of real estate project financing (PF) problems, are due to the fact that macroprudential policy has not been strongly implemented in practice." He added, "The Ministry of Economy and Finance, the Financial Services Commission, the Financial Supervisory Service, and the Bank of Korea should be able to discuss macroprudential policy, and in particular, a governance structure must be established that allows the Bank of Korea to raise its voice and implement policy strongly without political influence." The Bank of Korea recently conveyed to the National Planning Committee its position that it needs macroprudential policy tools.

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