Korea still Heavily Reliant on Real Estate…Urgent Financial Structural Reform is required

[By Jeong-yoon Lee, Edaily] “As long as finance continues flowing primarily into collateral-backed household and real estate lending, capital cannot adequately reach growth sectors.”

Kwanho Shin, Chairman of the Korea Money and Finance Association (KMFA) and a professor at Korea University, diagnosed the structural limitation of Korea‘s financial system as a “distortion in capital flows.”

In a recent interview with Edaily, he stated, “The essence of finance lies in determining where capital flows,” and pointed out that “Korea’s financial system is currently failing to properly perform its function of funneling funds into growth sectors.” He will co-present with Professor Thorsten Beck of the European University Institute (EUI) at the 17th Edaily Strategy Forum in June on the theme “Productive Finance and Economic Growth.”

Kwanho Shin, Chairman of the Korea Money and Finance Association (KMFA) and a professor at Korea University (Photo: Tae-hyung Kim, Edaily)

Chairman Shin emphasized that “productive finance” should not simply be viewed as increasing corporate loans. “The core function of finance is ultimately to determine where capital goes,” he said. “What matters is not how much money is released, but how efficiently that capital flows to areas with high growth potential.” He added, “As financial systems develop, capital allocation functions should become more sophisticated, yet Korea still remains heavily reliant on collateral. Because funds are heavily concentrated in stable household and real estate loans, the financial system remains relatively weak in evaluating which industries and companies will grow and supplying capital accordingly.”

He noted that the U.S. differs from Korea in this regard. While the U.S. also saw excessive capital flow into the housing market prior to the global financial crisis, it has since built a structure where capital circulates through the capital market back into corporations and innovative industries. “The U.S. has a well-established financial ecosystem ranging from venture capital and growth capital to public markets and a mature secondary marketst,” he explained. “Investment in innovative companies can continue only when there is a clear exit In contrast, Korea‘s underdeveloped exit markets and limited risk assessment capabilities at financial institutions have resulted in a entrenched structure where capital has become increasingly concentrated safe collateral assets such as real estate.

As a solution, he stressed that reforming the overall financial structure is more important than simply tightening lending regulations. ”The government should lead efforts to develop infrastructure for secondary markets and other exit channels so that capital can circulate into corporations and growth industries,“ he said. ”Structures that indirectly encourage capital demand toward real estate, such as Jeon-se loans and certain policy financing programs, also need to be gradually adjusted.“

Regarding the financial market, he analyzed that the international order is shifting toward a ”logic of power“ due to the Iran war and U.S.-China conflict, placing global financial markets in a fundamentally different phase. ”We are seeing a clear trend of financial fragmentation into blocs.“ Shin said. Rather than being globally distributed, capital is increasingly moving within geopolitical camps, making diversified investment increasingly difficult.”

He expressed concern that “while the U.S. previously served as a global safety net through measures like currency swaps, such functions are likely to operate more selectively in the future.” He added, “With new risks such as tariffs and controls over dollar payment networks, financial markets are moving toward a structurally more unstable direction.”

Looking ahead, Shin predicted that the global economic order will increasingly shift away from a single U.S.-centered system toward a more fragmented structure where currency and power are dispersed. “While the dollar may remain strong in the short term due to war, countries will expand efforts to reduce dollar dependency in the long run,” he said. “In that process, the role of governments will inevitably become more important, and Korea must also prepare for strategic diversification, including the mitigation of dollar dependency,” he advised.

◇About Kwanho Shin…

△ B.A. and M.A. in Economics, Seoul National University △ Ph.D. in Economics, University of California, Los Angeles (UCLA) △ Former Professor, University of Kansas △ (Current) Chairman, Korea Money and Finance Association (KMFA) △ (Current) Professor, Department of Economics, Korea University