Bank of Korea hosts 2026 BOK International Conference

Digital currency may weaken credit supply, researcher warns

Fed's credibility at risk if public sees political bias

The main and annex buildings of the Bank of Korea in Jung-gu, Seoul. [Herald DB]
The main and annex buildings of the Bank of Korea in Jung-gu, Seoul. [Herald DB]

By Kim Byeo-ri, The Herald Business

Central banks should incorporate "financial vulnerability" into their monetary policy decisions — not just inflation and economic growth — a senior IMF official argued Sunday.

Tobias Adrian, IMF financial counsellor and director of the Monetary and Capital Markets Department, made the case at the 2026 BOK International Conference held at the Bank of Korea's annex building in Seoul. "Rising leverage in the financial system and shifts in risk appetite among financial intermediaries can amplify asset price swings and business cycle fluctuations," he said, adding that macroprudential policy alone cannot fully contain such amplification effects.

Adrian said central bank interest rate adjustments affect the funding costs and risk-taking behavior of financial institutions, which in turn ripple through to consumption and production in the real economy via changes in lending and investment. "Even if financial stability is not a direct policy objective for central banks, financial vulnerability should be factored into monetary policy in order to reduce medium- to long-term volatility in inflation and the output gap," he said. The remarks were widely interpreted as a call to supplement the traditional central bank focus on price stability and output gap management.

Markus Brunnermeier, a professor at Princeton University, then presented what he called a "trilemma" model in a talk titled "The Payment-Credit-Digital Currency Trilemma." He argued that a digital currency system cannot simultaneously achieve all three of its core objectives: efficient payment and settlement, efficient credit supply, and privacy protection.

Efficient payment and settlement refers to low transaction costs and fast, convenient transfers; efficient credit supply means providing loans smoothly even to vulnerable borrowers or economic actors who lack sufficient collateral; and privacy protection means guaranteeing transaction anonymity and safeguarding personal data.

Brunnermeier said that if regulators mandate interoperability between dominant platforms and public digital payment instruments, payment efficiency improves but credit supply weakens. He added that measures to strengthen transaction anonymity make it harder to enforce loan repayment by borrowers, which also weakens credit supply.

He recommended that policymakers "fully account for these trade-offs" when designing future frameworks for central bank digital currencies, or CBDCs.

Michael Weber, a professor at Purdue University and ESMT Berlin, addressed the issue of public perceptions of political bias at the Federal Reserve. "Political perceptions of the Fed have a significant impact on macroeconomic expectations and trust," he said. "Even if the Fed believes itself to be politically independent and communicates as much, if the general public perceives it as politically biased, the effectiveness and credibility of monetary policy will fall sharply."

Weber said the Fed should develop a communication strategy that emphasizes its nonpartisan character and works to convince the public that it does not serve any particular interest group.

The Bank of Korea is holding the two-day 2026 BOK International Conference, which began Sunday, under the theme "Central Banks and the Future of Money." The event brings together the latest research and policy cases on topics including the link between financial stability and monetary policy, digital currency and payment innovation, communication strategy, the historical evolution of central banking, and AI technology.


kimstar@heraldcorp.com