Welfare Implications of Credit Rationing for Financial Consumers: An Empirical Investigation on the Case of the Korean Residential Mortgage Sector

Credit rationing through borrowing constraints has long been an important research topic in the literature, in the context of managing financial risks (i.e., financial stability) as well as of expanding financial service to more marginal borrower segments (i.e., financial inclusion). This study empirically investigates the role of borrowing constraints in the residential mortgage lending sector in Korea, by utilizing a discrete tenure choice model to test the constraining effects of two particular lending restrictions on households’ home owning decisions - the wealth and income constraints as measured by the maximum loan-to-value (LTV) ratio and that of debt-to-income (DTI) ratio. Using the household-level micro data from Korea, we report that: the lending restrictions exhibit negative effects on the propensity to own; those constraining effects are also shown to increase for younger borrower cohorts; and, the magnitude of the effect of wealth constraint is larger than that of the income constraint, which is consistent with the findings from the prior studies. Using the empirical findings, we discuss policy implications of relevancy, in particular, as to how to balance between two often competing policy objectives - ensuring financial stability and extending financial inclusion - in the context of the residential mortgage lending sector in Korea.

Credible or Biased?: An Analysis of Insurance Product Ratings in Germany

Instruments such as product ratings can help to overcome information asymmetries in retail financial markets. However, the capacity of ratings to promote market transparency and consumer awareness depends critically on whether they are credible. This article provides an empirical investigation of insurance product ratings in Germany, with an emphasis on the potential sources of bias that could undermine rating credibility. The analysis employs a panel dataset containing ratings for disability insurance products from two rating agencies over a 15-year period. Using the existing literature as a guide, we test a series of hypotheses regarding factors that may explain the variation in rating outcomes over time and across rating agencies. Our results suggest no major concerns regarding the credibility of insurance product ratings.

How to Avoid Household Debt Overhang?: An Analytical Framework and Analysis for India

In this paper we develop an analytical framework using the household utility maximization approach to model stability conditions to avoid household debt overhang. Our theoretical framework suggests that household debt stability is a function of five factors, namely the rate of interest, period of lending, income growth, loan-to-income ratio, and households’ disutility from borrowing. Further, we apply our analytical model to the case of India and estimate household debt stability conditions for Indian households under various scenarios to estimate the ceiling borrowing ratios below which households can avoid the risk of running into a debt overhang problem.

Investment Behavior of Women Business Owners in Myanmar

Individuals invest in different types of investment based on their preference and risk taking behavior. Depending on their financial knowledge and awareness, tax and social factors and personal factors, their investment decisions are different. The study aims to identify the investment behavior of women business owners in Yangon, to examine factors of investment behavior and to analyze the relationship between them. The studied population is about 2000 woman business owners, members of Myanmar Women Entrepreneur Association (MWEA). The sample was selected by using random sampling method with the sample size of 120 respondents. The result shows that respondents mostly invest in traditional assets such as bank deposits, gold and real estate, rather than modern financial assets such as bonds, stocks and insurance. They mostly used the traditional off-line trading method for investment except for securities trading using on-line means.

How does the Quantity of Disclosed Information Provided by Insurers Affect Entity Behaviors in Internet Insurance Market?: A Study Based on Tripartite Evolutionary Game Analysis between Government, Insurance Companies and Consumers

The emergence of internet insurance provides a new consumption pattern for insurance consumers in the e-commerce era. However, without insurers fulfilling duty of disclosure, consumers’ interests cannot be guaranteed. This paper will analyze the costs and benefits of three parties (i.e. government, insurance companies and consumers) and their strategies regarding information disclosure of insurance products on the internet. Using an evolutionary game model under bounded rationality assumptions, the Nash Equilibrium (NE) and evolutionary stability strategy (ESS) of the system are explored. The results show that (Disclosing, not Regulating, not Complain) is the best ESS and it is consumers’ buying decision not regulation that ultimately compels insurers to disclose enough information. The different current situations in China and Japan are discussed in light of the model, and some measures are suggested to promote the development of internet insurance markets in both countries.

The Assessment of Financial Literacy: The Case of Europe*

The study starts from the definition of financial literacy and its components, to identify the criteria that an assessment methodology should have to properly measure it. In the second part, an empirical analysis of the degree of financial literacy of adult population in several European countries (France, Germany, Italy, Sweden, UK) is used to highlight similarities and to stress differences between countries. Results show how the availability of 50 items allows to differentiate the levels of financial literacy in various areas of knowledge (e.g. loans, investments, money management). The use of money (e.g. credit cards, debit cards, cash) is the area of knowledge where individuals seem to be more well-informed and confident. Conversely, investment and investment products (e.g. stock, bonds) represent a weak point, with average scores being dramatically low.

The Impact of Fiscal Conservatism ; A Case Study of the 2007 National Pension System Reform in Korea

This research intends to identify the influential factors in the 2007 National Pension System (NPS) reform in Korea (the Republic of Korea) which drove the NPS toward a structural transformation. This research also examines the applicability of the theory of Clemens and Cook (1999) to the Korean policy shift, who argue that the innate driving force of a policy, an internal contradiction, can be a critical source of structural policy change. A literature review based case study was carried out in this research. The findings are as follows. Firstly, rising fiscal conservatism was the main determinant of the 2007 NPS structural reform. The processes and conditions of the reform documented were: the fiscal conservatism embedded in NPS generated serious policy problems and led to an accumulation of the internal contradictions within NPS by raising the question on its fundamental policy goal. As time passed without any self-correction mechanism with respect to the problematic policy, the NPS lost credibility in the eyes of the public and also lost policy legitimacy. At the same time, there was a competing policy alternative to the NPS. This was the universalistic tax-based Basic Old-Age Pension System. This has been a challenge to NPSin that it had been designed based on the social insurance financing principle. The pre-conditions for the structural NPS reform were fully complete and they could be exploited by self-interested political parties in the following policy-making stages. Secondly, the theoretical assumption that the internal contradiction of a policy can be a decisive power for structural transformation, as suggested by Clemens and Cook (1999) among others, was proven to be theoretically and practically accurate in the Korean public pension reform case.

Evaluating Borrower's Net Yield in Long-Term Fixed Rate Mortgage Loans in Korea

The Korean government has tried to change the structure of residential mortgages in Korea from the short-term variable-rate non-amorting loans to the long-term fixed-rate amorting loans since the early 2000’s. This study examines he borrower’s net yield from that new type of loans, which is defined as the difference between the lender’s yield out of the borrower’s repayment and the borrower’s yield from the expected gain on the portion of housing equity funded by cosnumer. The main hypothesis tested is that the borrower’s net yield will be affected by the time of loan origination and the level of mortgage interest rate charged because the future fluctuations of housing values and that of market interest rates are expected to be key determinants. The results confirm the hypothesis in that borrower’s net yields show positive or negative values according to the time of loan start, the level of fixed loan rates, or home regions. The results documented can offer a useful information as to the financial consumers’decision on loan amount and the timing of loan application considering the housing and mortgage market condition, which in turn can provide policy implication to regulating the maximum loan-to-value (LTV) ratio regulations.

How Does Medical Expenditure Affect Economic Development? Evidence from OECD Countries

This study views medical expenditure as an enhancement factor to human capital and, as such, medical expenditure and national healthcare system can have a positive impact on economic development. Using a non-balanced panel data of 26 OECD countries during the period of 1980 and 2008, we find that, as expected, the level of medical expenditure has a positive effect on economic development. In particular, total medical expenditure, public health expenditure and current health expenditure all show a positive effect while cost of capital for forming health care system has a negative impact on economic growth. No statistically significant effect of private health insurance expenditure is found. The effect of national healthcare system is also examined. Both National Health Service and National Health Insurance groups indicate a positive effect on economic progress with respect to total medical expenditure and public health expenditure. On the other hand, current health expenditure and private health insurance expenditure positively affect the National Health Insurance countries but negatively affect the National Health Service countries.

Financial Education Renaissance in Japan and the Role of CCFIS : A Policy Commentary

Financial education became a global agenda after the global financial crisis, and is one of the important elements of the SDGs. In Japan, although we have established a comprehensive system of financial education, the level of financial literacy is not high enough in comparison to other advanced economies. Rapid aging of the society and the increase in financial fraud demonstrate stronger need for enhancing the financial literacy of general public. The Central Council for Financial Services Information responded by publishing the Financial Literacy Map which describes the necessary knowledge and skills regarding money and finance, targeting at different age groups. We also conducted the Financial Literacy Survey, the result of which was widely reported by mass media. Based on the aforementioned products of our work, the Council is conducting various seminars, and publishing materials aimed at protecting consumers from financial fraud by enhancing their financial literacy and at providing necessary knowledge and skills to cope with the era of the 100-year life. In this connection, we are faced with the issue of how to enhance the financial literacy of teachers in times of rapid financial innovation, as well as in the unprecedented financial environment, such as the zero/negative interest rates. In particular, FinTech could have the effect of causing reverse literacy gap between teachers and students. In order to deal with such challenges, the Council is collaborating with relevant public and/or private institutions, e.g., the Financial Services Agency, local governments, representatives of financial institutions, to revive the spirit of Meiji era, when prominent figures stressed the importance of money in life. We should aim at “financial education renaissance” in Japan.