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KDI Policy Forum Examining the Liquidity Risk in the Household Sector and the Policy Implications July 16, 2020

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Series No. No. 279 (2020-04), eng.

KDI Policy Forum KOR Examining the Liquidity Risk in the Household Sector and the Policy Implications #Consumption, Investment, Export-Import, and Balance of Payments #Consumer Finance

July 16, 2020

  • KDI
    Kim, Young Il
utb
|   Related information   |
As the Covid-19 crisis gains momentum, a growing number of households are facing financial difficulties. Assets, such as savings, stocks and bonds, can be liquidated to compensate for the lack of earnings. But, those who lack even these could be in severe financial straits, or rather, at great liquidity risk. Then, who is at risk? Please check out the video! 

● Author
- Kim. Young Il, Fellow at KDI

● Go to related report
-Examining the Liquidity Risk in the Household Sector and the Policy Implications
|   Script   |
As the Covid-19 crisis gains momentum, a growing number of households are facing financial difficulties.

Assets, such as savings, stocks and bonds, can be liquidated to compensate for the lack of earnings.

But, those who lack even these could be in severe financial straits, or rather, at great liquidity risk.

Then, who is at risk?

To find out, this study first defines at-risk households as those who have been lacking in deficit-absorbing liquid assets for three months, and then, conducts an analysis.

Under the assumption that all households suffered a 20% loss of income compared to 2019, the analysis finds that the bottom quintile saw the biggest increase in at-liquidity-risk households.

Compared to the upper quintile, the increase is a staggering 13 times larger.

In terms of net assets, the loss suffered by the bottom quintile is 16 times that of the upper quintile, while the number of at-liquidity-risk households doubled among temporary and daily workers compared to their regular counterparts.

The results of the analysis show that there is a higher increase of at-risk households among the economically vulnerable, who have relatively less income and assets.

Given these conditions, it is also found that even a one million won subsidy can significantly reduce the number of at-liquidity-risk households.

Then, with limited funding, what measures can the government take?

Our analysis separates vulnerable households from households who hold non-liquidable assets, and examines the effectiveness of providing the vulnerable group with cash-based support while others received credit support.

The results reveal that this form of selective support alleviates the government’s fiscal burden by reducing the number of cash recipients, which ultimately, reduces the number of at-liquidity-risk households.

The protracted Covid crisis has spawned the need for policy measures that can help households with diminished incomes to avoid the risk of insolvency while also reducing their financial burden. Our analysis finds that a selective support method that provides cash to some and credit to others can be effective. To implement such a system, an information infrastructure must first be established to gain an understanding of the scale of liquidity risk and assets. Meanwhile, many more tasks remain to be resolved including the swelling debt of households who have the ability to repay, and the
fairness issue between the recipients and non-recipients of the subsidy.
Summary
■ In the wake of an unprecedented health crisis, households who lack liquid assets that could tackle their growing deficit (=income-expenditure) will endure severe financial difficulties.

■ The share of households facing liquidity risk will increase as incomes fall by bigger margins and exposure to the shock intensifies.

■ The liquidity risk resulting from COVID-19 will be even more pronounced among the economically vulnerable; specifically, those in the bottom quintile in terms of income and net assets, and temporary and daily wage workers.

■ Households at liquidity risk are particularly concentrated in the low income quintile. As such, a short-term income support program offering even a small amount of aid (e.g. 1 million won) could greatly help to reduce their liquidity risk.

■ In terms of support for at-liquidity-risk households, a selective approach which focuses the income support on the economically vulnerable and provides credit support in the form of collateral loans to asset-owning households will be more effective in easing the liquidity risk and the government’s fiscal burden.
Contents
1. Issues

2. Stress Testing Liquidity Risk

3. Changes in Liquidity Risk on an Income Shock

4. Comparing Policy Support: Alleviating the Liquidity Risk and Fiscal Burden

5. Summary and Policy Implications
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