Shin Hyun-song prioritizes financial stability… likely to be cautious about ‘preemptive rate hikes’

Reviewing 15 papers by the Bank of Korea governor nominee

Mortgage lending and FX liquidity regulation, among others

Emphasis on financial soundness, with expectations of preemptive action

Warns against excessive transparency by central banks

Attention on whether the BOK will maintain the ‘K dot plot’

Shin Hyun-song, the incoming nominee for governor of the Bank of Korea, is set to take the helm of monetary policy amid mounting fears of stagflation—an environment in which an economic downturn and rising inflation occur at the same time. An analysis of 15 of his signature papers shows that Shin has argued that when conducting monetary policy, policymakers should consider not only inflation but also the size of debt in the financial system, funding flows, and global liquidity. This is why expectations are emerging that Shin, who places financial stability above all else, is unlikely to preemptively raise the policy rate as markets fear. That said, the prevailing view is that if the U.S. central bank (Fed) pivots back to a rate-hiking stance, the Bank of Korea will have little choice but to follow with policy-rate increases. He is also expected to take on a more hawkish posture if concerns over rising household debt intensify.

◇ How the BOK communicates with markets

Shin first drew attention with his 1998 paper, ‘Unique Equilibrium in a Self-Fulfilling Currency Attack Model,’ which demonstrated that currency crises can be amplified not only by fundamentals (economic underpinnings) but also by the interplay of market participants’ expectations and financial variables. This led to the view that monetary policy should look beyond inflation and growth to also account for expectation management and financial variables.

In his 2002 paper, ‘The Social Value of Public Information,’ he noted that excessive disclosure by a central bank can instead lead market participants to rely too heavily on public signals, exacerbating herding behavior. This underpins the view that he will be cautious about forward guidance that pre-announces the policy path for the benchmark rate.

Choi Jae-won, a professor of economics at Seoul National University, said, “Forward guidance is a painful measure used by central banks that must curb inflation when interest rates are already low,” adding, “Shin is highly likely to judge that forward guidance exerts an overly strong influence on financial markets.” Still, Shin believes the central bank’s communication approach needs to evolve with greater precision. There is speculation he could expand and further develop the ‘K dot plot’ introduced by Governor Lee Chang-yong in February.

◇ Financial stability that reflects macroeconomic conditions

Starting with his 2008 paper, ‘Financial Intermediaries, Financial Stability, and Monetary Policy,’ Shin’s focus shifted toward tools for financial stability. In the paper, he pointed out that rate cuts do not merely stimulate the economy; they can also induce financial firms to expand leverage, increasing systemic risk.

His 2011 paper, ‘Macroprudential Policies Beyond Basel III,’ is seen as his de facto policy manifesto. It argued that capital regulation alone is insufficient for financial stability and that macroprudential tools covering the entire system—such as lending by financial institutions and foreign-currency funding—are needed.

In his 2018 paper, ‘Why Bank Capital Is Important for Monetary Policy,’ he underscored the importance of non-core liabilities as an early warning signal of financial crises. “A sharp increase in non-core liabilities is an indicator that the risk premium is weakening,” he said, noting that the more banks rely on market-based funding rather than deposits, the more vulnerable the system becomes.

This is also why observers expect Shin to take a keen interest in Korea’s real-estate lending and FX liquidity regulations, as well as the management of non-core liabilities. Choi Sang-yup, a professor at Yonsei University, said, “True to his BIS background, Shin has been wary of banks and households taking on excessive debt and bearing heightened risk,” adding, “The preemptive response he emphasizes goes beyond simple rate hikes and means taking preemptive measures from a macro perspective, including debt.”

◇ Global liquidity… ‘domestic variables alone are not enough’

The argument that central banks should actively incorporate global financial conditions is regarded as Shin’s most distinctive academic domain. He contends that it is not enough for central banks to look only at domestic inflation and growth when setting the policy rate; in particular, open economies like Korea must also consider global dollar flows and cross-border bank credit. His paper ‘Capital Flows and the Risk-Taking Channel of Monetary Policy’ (2015), which explained the mechanism by which low interest rates in advanced economies such as the U.S. fuel credit expansion and capital inflows into emerging markets, is a representative work highlighting the limits of central banks that set rates solely based on domestic business conditions.

Shin analyzed, “The dollar is a key indicator of risk-taking capacity in global capital markets,” adding, “Global factors play a larger role than domestic factors in determining capital flows in the banking sector.”

Citing this research track record, experts said that if Shin were to move to preemptive rate hikes, external factors—rather than inflation—would likely be the main drivers, such as the Fed’s policy-rate situation, the exchange rate, and international oil prices. Professor Choi said, “He could raise rates preemptively to prevent worsening capital outflows driven by a stronger dollar and weaker won, and to block high levels of household debt from making the economy more difficult.”

Reported by Jung Young-hyo / Shim Sung-mi hugh@hankyung.com