Joon-Ho Hahm

Consumption Adjustment under Time-Varying Income Uncertainty

We study the effect of income uncertainty on consumption in a model that includes precautionary saving. In contrast to previous studies, we focus on time-series variation in income uncertainty. Our time-series measure of income uncertainty is constructed from a panel of forecasts. We find evidence of precautionary saving in that increases in income uncertainty are related to increases in aggregate rates of saving. We also find evidence that anticipated income growth rates have less explanatory power for consumption growth rates after conditioning on income uncertainty. The evidence indicates the presence of forward-looking consumers who gradually adjust precautionary savings in response to changing income uncertainty.

The Korean financial crisis: an asymmetric information perspective

Abstract This paper uses an asymmetric information framework to understand the causes of the recent financial crisis in Korea. It shows that the Korean data is consistent with this explanation of the crisis.

Interest rate and exchange rate exposures of banking institutions in pre-crisis Korea

This study empirically investigates interest rate and exchange rate exposures of banking institutions in pre-crisis Korea. Using the sensitivity of stock returns as a measure of the exposure, it is shown that Korean commercial banks and merchant banking corporations had been significantly exposed to both interest rate and exchange rate risks, and that the subsequent profitability of commercial banks was significantly associated with the degree of pre-crisis exposure. The evidence suggests that, along with the negative exposure of banking institutions, the sharp depreciation of the Korean won and high interest rates at the end of 1997 further deteriorated the banking sectors capital adequacy worsening the financial crisis. The Korean case highlights the importance of upgrading financial supervision and risk management practices as a precondition for successful financial liberalization.

Consumption adjustment to real interest rates: Intertemporal substitution revisited

Abstract This paper investigates the degree of elasticity of intertemporal substitution in consumption using post-war US aggregate data. Previous findings suggest that the elasticity of substitution is unlikely to be much above 0.1 and may well be zero. In contrast, I find strong evidence that there is a statistically significant positive response of consumption growth to changes in expected real interest rates. The elasticity estimates cluster around 0.3. Previous weak results are attributed to either the inappropriate choice of instruments or the use of an inadequate measure of consumption. This finding is robust to considerations of the time aggregation bias, different sample periods, and alternative formulations of the permanent income consumption model which include ‘rule-of-sum’ consumers and borrowing constraints. For example, if the Campbell and Mankiw model is adopted as an approximate description of US aggregate time series in consumption, income and real interest rates, the implied elasticity of intertemporal substitution for permanent income consumers could be as high as 0.8, which implies that the coefficient of relative risk aversion is around 1.25.

COST-AT-RISK AND BENCHMARK GOVERNMENT DEBT PORTFOLIO IN KOREA

This paper provides a framework to identify and achieve a benchmark portfolio structure for government debt based upon the trade-off between expected debt-service-cost and risk. Using actual Korean government debt data, we empirically derive a medium-term efficient frontier conditional upon the existing portfolio structure. In addition, a target benchmark portfolio is identified from the efficient frontier by employing a penalty function with cost-at-risk and duration gap as two penalty factors. The target portfolio identified above also implies an optimal borrowing policy as to the maturity mix of the government bond issuance. [H6, G1, F3]

Monetary aggregates and procyclicality of the financial system: an Asian perspective

The growth of financial markets has clearly outpaced the development of financial market regulations. With growing complexity in the world of finance and the resultant higher frequency of financial crises, all eyes have shifted toward the current inadequacy of financial regulation. This book expertly examines what this episode means for Asia’s financial sector and its stability, and what the implications will be for the region’s financial regulation. By focusing on legal and institutional frameworks the book also elaborates on various issues and challenges in terms of how financial liberalization can maximize the benefits and minimize the risks of crisis.

Economic effects of positive credit information sharing: the case of Korea

In many countries, in addition to negative credit information such as loan default and arrears, positive credit information is also exchanged on a voluntary and reciprocal basis. Employing optimal credit decision models of profit maximizing banks, and utilizing a unique dataset of 2 million consumer loan obligors in Korea, we investigate the economic effects of sharing positive credit information in addition to negative credit information already exchanged. We find that the discriminatory power of the credit scoring model improves significantly. We proceed to investigate the economic effects of the information gap in a competitive credit market by assuming two representative banks that differ only in the level of credit information sharing. The bank that utilizes negative information only suffers from deterioration of the borrower pool and reduced profit, as high credit risk borrowers are more concentrated on this bank due to underpricing of risks. Our finding suggests that banks have incentives to voluntarily participate in the positive information sharing mechanism, since even a small difference in discriminatory power stemming from the information gap may lead to a significant fall in profitability as the distribution of borrower quality changes endogenously due to adverse selection problems.

Determinants and Consequences of Non-Interest Income Diversification of Commercial Banks in OECD Countries

This paper studies determinants and consequences of theThis paper studies determinants and consequences of the changing income structure of commercial banks in the era of financial conglomeration. Utilizing a dataset of 662 relatively large commercial banks in 29 OECD countries from 1992 to 2006, we find that banks with relatively large asset sizes, low net interest margins, high impaired loan ratios, and high cost-income ratios tend to exhibit higher non-interest income shares. As for macroeconomic factors, banks in countries with slow economic growth, a stable inflation environment, and well- developed stock markets tend to show higher non-interest income shares. Second, we investigate the consequences of non-interest income expansion on bank profitability and risks. While the positive effects on profit and capital adequacy seem to become weaker under the consideration of macroeconomic factors and endogeneity problems, the adverse impact on profit variability remains robust. Overall, these findings suggest that expanding toward non-interest income may not produce desired income diversification effects, and it does not necessarily imply a shift toward superior return-risk frontiers.

The Korean Model of Corporate Governance: Issues and Lessons in Reform of Bank Governance

Recent financial crises in emerging market countries highlighted the importance of a robust and efficient banking system in pursuing sustainable economic growth. Koreas economic crisis also resulted from the failure of the banking system in performing its genuine role of financial intermediation. Over the last six years since the 1997-98 financial crisis, remarkable progress has been made in reconstructing Koreas outmoded banking system. This article first takes on a historical approach in tracing the development of the banking institutions in Korea since the 1960s. Then, it focuses on the corporate governance reform efforts of Korean commercial banks through a case study of Woori Bank - the largest government-intervened commercial bank in Korea. Overall, the reform efforts at Woori Bank have been impressive, resulting in a strengthened governance structure, a better defined set of duties and responsibilities for the bank CEO and the board, an upgraded internal control system, and an enhanced risk management and corporate monitoring. Yet, further reform agendum need to be scrutinized.

Foreign currency liquidity risk and prudential regulation of banks

Recent events, such as capital flow reversals and banking sector crises, have shaken faith in the widely held belief in the benefits of greater financial integration and financial deepening, which are typical in advanced economies. This book shows that emerging economies have often weathered the storm best despite the supposed burden of ‘weak institutions’. It demonstrates that a better policy framework requires reliable indicators of vulnerability to financial instability, as well as improved policy tools and automatic stabilizers that anticipate and limit the vulnerabilities to financial crises.