Macroprudential policies in Korea – Key measures and experiences

The Bank of Korea is strengthening its ability to identify risk factors at an early stage by monitoring the basis of macroprudential conditions. Through its Financial Stability Report, a semi-annual statutory report, the Bank assesses macroprudential conditions, delivers early warnings, and presents policy alternatives. In addition, the Bank identifies the impacts of various types of macroeconomic shocks on the financial system through its recently-developed Systemic risk assessment model for macroprudential policy (SAMP). SAMP is utilised not only for systemic risk monitoring, but also for macro stress tests and the assessment of macroprudential policy effectiveness. The macroprudential policy instruments used in Korea are loan-to-value (LTV) and debt-to-income (DTI) regulations, foreign exchange (FX)-related measures, and regulation of the loan-to-deposit ratio. So far these instruments are assessed as having effectively mitigated the build-up of systemic risk. First, the LTV DTI regulations have contributed to curbing the high procyclicality of mortgage lending. Second, the FX related measures have helped to reduce the volatility of capital in- and outflows in Korea, whose level of capital liberalisation is high. Third, the loan-to-deposit ratio regulation has eased the procyclicality of lending and the interconnectedness among financial institutions created through their expansions of credit supply via wholesale funding. At the same time, of course, these tools have also given rise to some unintended consequences. Strengthening of the framework for monitoring macroprudential conditions, and the development of policy instruments, are areas where continuous policy efforts will be needed in the future as well. In particular, Korea plans a discussion of institutional arrangements for cooperation among the authorities responsible for financial stability.