Financial regulator mulls forming stock market stabilization fund

Financial Services Commission (FSC) Chairman Kim Joo-hyun speaks during the inauguration ceremony held at the government complex in central Seoul on July 11. Newsis

By Anna J. Park

Korea's top financial regulator has hinted at the possibility of employing a stock market stabilization fund, aiming to support sagging local stock market indices by injecting a sufficient amount of liquidity.

This is the first time since 2020 that the stock market stabilization fund was mentioned by a key financial regulator. Following his inauguration early last week, Financial Services Commission (FSC) Chairman Kim Joo-hyun told reporters of the possibility of creating the stock market stabilization fund if necessary.

The stock market stabilization fund refers to a pool of money created jointly by private financial institutions as well as state-run lenders and agencies, which is designed to be invested by a fund management committee.

The latest stock market stabilization fund was formed back in 2020 when the global pandemic erupted. That fund involved 23 private financial firms, 5 major financial groups ― KB, Shinhan, Woori, Hana and NongHyup ― while key state-run banks and agencies, including Korea Development Bank (KDB) and the Korea Exchange (KRX), also chipped in and amounted to a whopping 10.76 trillion won ($8.12 billion). It was the largest amount ever pooled together for a stock market stabilization fund in Korea's history. The first fund was created in 2003 amounting to 400 billion won, followed by another one worth around 500 billion won in 2008.

The money was devised to be temporarily operated by investing in various benchmark market index-tracking products, with the main goal of preventing a market crash. However, the third and latest stabilization fund created in 2020 was actually largely unspent, as the local stock market indices radically rebounded following the announcement of the fund's creation in late March 2020, removing the necessity of injecting the allocated money into the market.

Back in 2008, the implementation of a stock market stabilization fund worth 500 billion won also induced a 5.8-percent increase in the benchmark KOSPI index on the day the money was injected into the market.

Based on these successful cases, financial policymakers are once again considering whether to employ the option, hoping to stimulate the weakened local stock market. The KOSPI fell by more than 21 percent so far this year, mainly due to a massive sell-off of local stocks by foreign investors.

Market experts said the implementation of the fund will create a noticeably favorable result, although the effect could be limited.

“The past records of such market stabilization funds' implementation have shown the effectiveness of the measure,” Han Jae-hyuk, an analyst at Hana Securities, said.

Jung Yeon-woo, head of research at Daishin Securities, explained that the implementation of the fund itself does not guarantee a sudden rally of market indices, despite its positive effect for a short period.

“The creation of the fund could bring forth a mitigation of market anxiety in the short term, as it demonstrates the authorities' determination to stabilize the market,” Jung said. “The key driver of a stock market rebound comes from a recovery of fundamentals,” he added.