[Economy Pulse]Making the F4 Official: Content Over Name

Recently, volatility in the financial market has increased significantly. The KOSPI has become the most volatile among major stock markets, as concerns mount over whether investment demand driven by artificial intelligence (AI) will continue, long-term interest rates rise, and the possibility of China catching up becomes more plausible. Amid this turbulence, there is also news that the policymaker responsible for introducing single-stock leveraged exchange-traded funds (ETFs) has stepped down. The situation is not much different in real estate policy. While the intention to curb speculative demand through measures such as tax reforms centered on actual residence and a comprehensive survey of farmland is understandable, questions remain as to whether these policies were actually crafted after a thorough consideration of potential side effects. Was it truly difficult to anticipate how these tax changes and farmland surveys would affect tenants and on-site cultivators? Both cases vividly show that a comprehensive review of policy, rather than a fragmented perspective of individual ministries, is necessary.

The case of the single-stock leveraged ETF carries important implications. At the time of its introduction, the goal was to redirect personal funds flowing into overseas leveraged products back into the domestic market, thereby easing upward pressure on the exchange rate and broadening the profit base of domestic financial institutions. However, given the enormous influence and weighting of two semiconductor companies in the Korean capital market, significant price swings in leveraged products ended up amplifying the volatility of underlying assets—namely Samsung Electronics and SK hynix—and this volatility, in turn, spread to the market as a whole; the so-called "wag the dog" phenomenon. As a result, a policy initially intended for the foreign exchange market ultimately destabilized the stock market.

This issue is less a problem of a particular ministry and more a structural one. Each ministry has its own core target variables, and when assessing the impact of policy, they tend to focus on metrics pertinent to their own performance rather than the national economy as a whole. Naturally, this makes them less attentive to unintended consequences. While there would be no issue if each policy tool corresponded one-to-one with its effects, in reality, various tools are intricately intertwined, which necessitates integrated decision-making. Furthermore, ministerial self-interest—seen in the reluctance to relinquish jurisdiction and the passive sharing of information—renders comprehensive policy review even more difficult.

The Financial Supervisory Service conducts micro-level supervision of individual financial institutions, the Bank of Korea is responsible for overall financial stability at the macro level, and the Financial Services Commission supervises financial policy as a whole. Although a financial stability function was added to the Bank of Korea Act at the end of 2011, the means available to fulfill these obligations remain insufficient. Overlapping responsibilities are not uncommon, which is why discussions about restructuring financial regulatory bodies surface every time there is an administration change. However, it is difficult to completely separate these agencies or clearly define the responsibilities and authority of each. Ultimately, the answer lies in cooperation and coordination—especially when it comes to designing the institutional framework of the financial market.

Up until now, the so-called “F4 meeting”—a gathering of the Deputy Prime Minister, Chairman of the Financial Services Commission, Governor of the Bank of Korea, and Head of the Financial Supervisory Service—has played this role. However, this is an unofficial body—it has no decision-making or proposal authority and serves primarily as an information-sharing session. It is true that it has fulfilled a certain role during times of crisis, but the discussions are not documented, and it is unclear how conclusions translate into actual ministerial policy. The Macroeconomic and Financial Meeting, attended by vice ministers, remains only a mechanism for monitoring the market. In this context, the government's announcement in July of the creation of a new official meeting body at the minister and agency head level—as part of its second-half economic growth strategy, to include the Ministry of Economy and Finance, the Bank of Korea, the Financial Services Commission, and the Financial Supervisory Service, with the Ministry of Land, Infrastructure and Transport and others joining when necessary—is a positive step forward.

The key is to ensure that this new body does not simply become a renamed version of existing consultative meetings. Procedures must provide real substance: the heads of each ministry should meet regularly and irregularly to coordinate opinions from the perspective of the overall national economy, and the body’s function to propose implementation of agreed conclusions through the available means of each ministry should be clearly defined. Even if the decisions are not legally binding, if any ministry chooses not to follow these proposals, they should be required to provide an official explanation, and the contents of discussions should be recorded. This would make responsibility for policy making and execution much clearer. Concerns that recording such discussions could stifle open debate could be addressed by controlling the timing of their disclosure. There are already more than enough agenda items to tackle: household debt, real estate policy, private equity fund (PEF) loans and other financial risk factors, legislation for virtual assets and the introduction of stablecoins, responses to foreign exchange market instability, the establishment of shock absorbers for external shocks, and so on. Now, when the market is experiencing significant turmoil, may well be the time to properly establish such a framework.

Kwak Nosun, Professor of Economics at Sogang University (next President of the Korean Economic Association)

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