Bank of Korea (BOK) Governor Shin Hyun-song admits misjudgment and missteps: “Failed to warn of leveraged ETF risks”

[Financial News] BOK Governor Shin Hyun-song acknowledged the BOK’s misjudgment and missteps in introducing single-stock leveraged exchange-traded funds (ETFs), which have been identified as a major source of stock-market volatility, on the 12th.
Responding to criticism that the BOK had failed to do its job when leveraged ETFs were introduced, at a National Assembly audit by the Finance and Economy Planning Committee that day, Governor Shin said, “Even at the Monetary Policy Board meeting in late May, we had not fully grasped the volatility in the memory semiconductor sector,” adding, “I am sorry to the public for failing to adequately warn of the risks.”
Regarding the BOK’s June Financial Stability Report, which assessed that leveraged ETFs would help keep domestic investment funds from flowing overseas and increase foreign capital inflows, Governor Shin also admitted the Bank had misjudged the situation. He said, “Given the circumstances in late May and early June, when the report was being prepared, the passage saying the impact on the market would be limited was not appropriate.”
Domestic single-stock leveraged and inverse ETFs were listed on May 27. In the short period that followed, funds poured in excessively and volatility surged, sending stock prices plunging and throwing the market into turmoil.
Shin partly accepted criticism that the mismatch between the government’s expansionary fiscal policy and its tight monetary policy stance was stoking inflation, but countered that the impact on markets was not significant.
Governor Shin said, “The government’s expansionary fiscal policy does, in any case, put pressure on inflation,” adding, “We are using models to test whether it actually creates a mismatch.”
The BOK estimates that the government’s expansionary budget raises GDP by 0.5 percentage points and inflation by 0.06 percentage points.
However, Governor Shin said, “If the potential growth rate rises over the medium to long term as a result of expansionary fiscal policy, there may not be a mismatch,” adding, “Upward pressure on inflation of around 0.06 percentage points can be considered not very large.”

[email protected] Jeong Sang-gyun Reporter