Bank of Korea Deputy Governor Jang Jeong-su (center) speaks at a briefing on the Financial Stability Report held at the Bank of Korea in Jung-gu, Seoul, on the 24th. Photo courtesy of the Bank of Korea
The Bank of Korea warned that a surge in debt-fueled stock buying and leveraged investment products could amplify investor losses and market volatility. The central bank assessed that with borrowing-backed investments rising during a stock market rally, a price correction could combine forced selling with redemptions of leveraged exchange-traded funds (ETFs) to intensify downward pressure.
In its “2026 First-Half Financial Stability Report,” approved by the Monetary Policy Committee on the 24th, the Bank of Korea analyzed the risks stemming from a sharp expansion of leveraged investments aimed at extra returns amid the stock market’s rise since last year. The central bank classified both stock purchases through loans and investments in leveraged ETFs—designed to move up and down more sharply than their underlying assets—as leveraged investment.
The balance of credit loans and credit overdrafts borrowed from brokerages for investment purposes reached 39.4 trillion won at the end of May, more than double the 19.2 trillion won a year earlier. Total net assets of leveraged ETFs also surged 176.6%, from 12.8 trillion won at the end of last year to 35.4 trillion won in May this year. Combined, stock market leveraged investment stood at 74.8 trillion won, up 82.4% in five months from 41 trillion won at the end of last year.
The Bank of Korea saw the possibility that a significant portion of the increase in other household loans had also flowed into the stock market. It viewed not only housing-related loans but also stock-related loans as factors driving the rise in household debt. The central bank’s concern is that a situation similar to recent investor losses—which mounted after the launch of leveraged ETFs tied to single stocks such as Samsung Electronics and SK hynix, followed by sharp declines in those shares—could occur on a broader scale.
In particular, the Bank of Korea warned that the damage would not be limited to investors who took on debt. Jang Jeong-su, deputy governor of the Bank of Korea, explained at a press briefing that day, “When you invest with leverage, price volatility inevitably increases,” adding, “When prices fall, stocks get sold off through forced liquidation, which makes volatility even greater.” He then pointed to the externalities of leveraged investment, saying, “Even people who did not invest with borrowed money can suffer greater losses as volatility rises.”
Forced liquidation refers to when a brokerage forcibly sells a borrowing investor’s stocks to recover the loan principal once the share price falls below a certain level. When forced liquidations cluster during a sharp market drop, additional supply floods the market and can deepen the decline. Leveraged ETFs can also act as a factor widening price swings through increased redemptions or fund position adjustments.
Leverage risk is also detected in the short-term funding market. Repurchase agreement (RP) transactions—in which securities firms and investment funds pledge government bonds and other assets as collateral to borrow short-term funds—have risen sharply. The RP sale balance of securities firms and investment funds reached 228.2 trillion won in May this year, 9.7 times the 23.6 trillion won in January 2015.
In particular, investment funds’ RP balance rose 60.4%, from 93.8 trillion won in January last year to 150.5 trillion won in May this year. The Bank of Korea saw limited potential for short-term funding transactions backed by government bonds to immediately escalate into systemic risk. However, it warned that if redemption demands increase at the funds providing the money, the rollover risk—where securities firms and investment funds cannot secure new funding—could grow.
The structure in which leverage liquidation amplifies price declines also appeared in cryptocurrencies and foreign derivatives trading. Cryptocurrency futures open interest swelled to $204.1 billion in September last year and remained at $125.1 billion in May this year. This means a vicious cycle could repeat, in which price declines lead to margin shortfalls and forced liquidations, triggering further declines.
A similar path was cited in the stock market. Foreign investment funds in domestic stocks saw net outflows of $29.78 billion in March and $31.83 billion in May. The Bank of Korea raised the possibility that derivatives liquidation by global investment banks (IBs) increased selling pressure on domestic stocks.
The Bank of Korea viewed rate hikes as a “double-edged sword”—able to curb leveraged investment and ease financial imbalances while simultaneously increasing the debt-repayment burden on vulnerable borrowers. Deputy Governor Jang stressed, “While closely monitoring the potential accumulation of financial imbalances, it is necessary to continue coordinating monetary policy and macroprudential policy, and to pursue market stability and management of vulnerable sectors in parallel.”