SEOUL—South Korea's government is preparing market rescue options after the Kospi index dropped 18 percent over three weeks, severely affecting an estimated 700,000 retail traders holding leveraged positions in domestic equities.
Margin debt across South Korean brokerages hit a record ₩32 trillion ($23 billion) in May, driven by aggressive speculation in technology and pharmaceutical sectors. That buildup now threatens a cascade of forced liquidations as prices fall, compressing already-thin dealer balance sheets and amplifying downside pressure across the index.
The Ministry of Finance confirmed discussions with the Financial Services Commission (FSC) and the Bank of Korea focused on containing systemic risk from potential margin call cascades.
The primary option under consideration is activating the Stock Market Stabilization Fund, a mechanism last deployed during the 2020 pandemic downturn. The fund is designed to purchase undervalued equities, providing a floor for the market. In 2020 it carried ₩10.7 trillion ($7.7 billion) in capitalization and helped stabilize sentiment; current proposals suggest scaling it to ₩15 trillion ($10.8 billion).
The Bank of Korea is also evaluating its role. While the central bank does not intervene directly in equity markets, it could expand repurchase operations or delay any hawkish shift in monetary policy to keep liquidity flowing to brokerages managing deteriorating collateral.
FSC Chairman Kim Joo-hyun said the commission is monitoring brokerage balance sheets closely and indicated temporary short-selling bans could follow if volatility escalates. Such a ban would repeat precedents from the 2008 global financial crisis and the 2020 pandemic. Retail investors have long advocated for stricter short-selling rules.
The retail concentration raises a harder problem: many affected traders financed equity purchases through personal loans or credit lines, tying household debt directly to equity collateral. A sustained Kospi decline doesn't stay in brokerage accounts—it migrates onto bank balance sheets through unsecured consumer credit.
Some analysts caution against direct market intervention, arguing that repeated bailouts encourage excessive risk-taking by retail investors and distort price discovery and long-term market efficiency.
The Ministry of Finance expects to announce a finalized package by Aug. 15, with the decision contingent on market performance over the next two weeks and institutional investor sentiment.
The Kospi's decline pushed the index to its lowest level since November 2023. The two-year Korean Treasury yield rose 5 basis points to 3.78 percent, reflecting rising risk aversion and the prospect of increased government bond issuance to fund stabilization efforts—a supply overhang that could pressure the short end of the curve further if the fund is fully deployed.
