"Reducing All-In and Leveraged Investing in Stocks"... Financial Supervisory Service to Develop Investment Guidelines by Income and Asset Level

Promoting Investment Guidelines Tailored to Household Types
Recommending Stock Investment Proportions Based on Risk Tolerance
Data Integration Key... Collaboration with Relevant Agencies Underway

The Financial Supervisory Service (FSS) is working to introduce “Household Investment Guidelines” that will recommend appropriate proportions of high-risk asset investments, taking into account households’ income and assets in a comprehensive manner. The initiative aims to offer investment standards suited to each household’s ability to absorb loss, in an effort to curb excessive leverage-driven investments and overconcentration in risky assets. This follows a sharp rise in so-called ‘bietu’ (borrowing to invest) during the stock market’s upturn earlier this year, and the recent increase in losses among individual investors during the market correction phase.

According to financial supervisory authorities on July 28, the FSS is reviewing detailed measures to introduce investment guidelines that incorporate households’ real estate and financial asset holdings, as well as income and liabilities. It is the first time the financial authorities are attempting to set forth official asset allocation principles tailored to each household’s unique characteristics.

A senior FSS official stated, “The problem of leverage-based stock investments has become severe. If investment standards appropriate for each household’s situation can be provided, it could help reduce both ‘yeonggeul’ (borrowing to the limit) and ‘bietu’.” The official also added, “Given the limits of the data the FSS holds, we are considering plans to prepare detailed guidelines in collaboration with relevant ministries and agencies.”

The proposed guidelines will classify households based on factors such as household composition, types and amounts of assets, income, and debt, then recommend proportions for investments in riskier assets like stocks for each category. In effect, this will provide households with investment guidelines specifying, for example, “what percentage of your assets and annual income makes it reasonable to invest in high-risk assets, given your loss-absorption capacity.”

For instance, the guidelines may present different standards for a single-person household in their 30s with an annual income of 50 million won and assets of 200 million won, versus a four-person household, such as a couple in their 40s earning a combined 200 million won annually, with assets of 1 billion won and two children. Rather than recommending a one-size-fits-all standard such as “70% in safe assets, 30% in risky assets,” the guidelines will place emphasis on each household’s specific financial structure and loss tolerance.

The FSS is pursuing this approach because it believes that risk tolerance varies across households, yet aggressive investment behavior has been spreading rapidly. FSS Governor Lee Chanjin has reportedly advised internally, since before the KOSPI’s correction, that reckless leverage-based investments and the possibility of a stock market downturn are causes for concern, and that it is necessary to assess each household’s financial state and prepare adequate countermeasures.

Recently, investments using margin loans and other forms of borrowed capital have been surging. According to the Korea Financial Investment Association, the outstanding balance of margin loans stood at 32.6716 trillion won as of July 24—an increase of 5.2509 trillion won from 27.4207 trillion won at the beginning of this year. “Shadow leverage investments” are also on the rise. The combined overdraft loan balances at Korea’s top five commercial banks (KB Kookmin, Shinhan, Hana, Woori, and NH Nonghyup) exceeded 44 trillion won for the first time on July 16, up from 39.7257 trillion won at the start of the year.

As borrowing-fueled investments have become more widespread, volatility has increased alongside the stock market correction, bringing renewed attention to leverage-related risks such as forced selling. If the downtrend in stock prices persists, forced liquidations and defaulted claims could rise, leading not only to larger investment losses and increased market volatility but also undermining the soundness of financial institutions due to potential deterioration in margin loans and credit loans.

The need to manage investment risks is growing, but limitations in securing personal financial data are slowing policy implementation. Developing investment guidelines requires comprehensively utilizing household data on assets, liabilities, and income. The key issue is how accurately and thoroughly such financial information can be gathered and analyzed. Because linking data across agencies and ministries is necessary, it is expected that formulating detailed implementation plans will take time.

An FSS official commented, “Because each household’s asset size, income, debt, investment goals, and risk tolerance are all different, it is realistically difficult to recommend a uniform investment ratio. Just as it would not be appropriate to give identical investment recommendations to a person with 3 billion won in assets as to someone with 200 million won, individual household situations must be comprehensively considered.”

This content was produced with the assistance of AI translation services.