There has indeed been a great deal of change in the financial markets in Korea since the financial crisis in 1997~1998. In the money market, where inter-bank call loans and CP were the major instruments for the intermediation of money, the role of dealers has been diminished in order to mitigate the negative effects of information asymmetries between money market dealers and market participants. This trend was reinforced by the expulsion of nearly every merchant bank, which were active dealers in the money markets, from the financial market in the process of the financial restructuring.
The weakening of the money market dealers, however, has had serious and unexpected negative side-effects on investment in the real sector. As the ratio of intermediation of funds through the money brokers was suddenly increased and the number of merchant banks dramatically decreased, the profile of short-term financial assets intermediated in the money markets became biased toward safety to an excessive degree. It is the excessive risk aversion of financial institutions that could very well be at the heart of the contraction in real investment, for it was they that usually handled the process of risk assessment and took risks.
The micro function of the money market also changed greatly. The removal of the money market dealers, who used to transform short-term money market assets into longer-term money market assets, effectively broke the linkage between the money market interest rates and severed the conduits between the money markets and capital markets. Further- more, the money market no longer served as an adjustment market for reserve money among banks.
As a result of these changes, the money market rate no longer represents the supply and demand of money. Though the Bank of Korea could set the call rate as a target interest rate at its discretion, the money market interest rates do not offer any information on the condition of the money markets.
In order to mitigate the adverse side effects of the institutional and practical changes in the money markets on the financial markets and real sector, the risk-taking function of the money markets should be restored to some degree. If there is no large pool of money market intermediaries who take risks to the proper extent, there might not be any possibility for financial institutions to maintain their profitability and soundness, and there would be no reason to expect an increase in the long-term potential growth rate of the Korean economy
자금중개시장의 현황과 과제(Money markets in Korea: Current issues and perspectives)
서울 : 한국금융연구원
|Series Title; No||정책조사보고서 / 2004-05|
|Subject Country||South Korea(Asia and Pacific)|
|Subject||Economy < Financial Policy|
|Holding||한국금융연구원; KDI 국제정책대학원|