Bank of Korea 'Financial Stability Situation' Report
[Asia Economy Reporters Eunbyeol Kim and Sehee Jang] Overseas assets invested by securities firms or insurance companies to increase profitability could become another ticking time bomb for the Korean economy. Due to the spread of the novel coronavirus infection (COVID-19), countries have implemented lockdown measures, raising concerns about investment losses in commercial real estate such as hotels and office buildings. The deterioration of corporate earnings, which could lead to a downgrade in corporate bond credit ratings, is also a risk factor.
On the 24th, the Bank of Korea released the "Financial Stability Report," stating, "Concerns about investment losses in overseas commercial real estate such as hotels are increasing due to the spread of COVID-19," and "A stress test on capital adequacy was conducted on 35 domestic securities firms, revealing that in the worst-case scenario, capital adequacy could deteriorate to levels similar to those during the global financial crisis."
According to the Bank of Korea, as of the end of June, the REITs (Real Estate Investment Trusts) index had fallen 18.7% from its peak. If this index falls by 57%, the average capital ratio of all securities firms could drop from 801% in the first quarter to 447%. This means that depending on the commercial real estate situation, the capital ratio of securities firms could fall by nearly half. Some securities firms are even expected to fail to meet regulatory standards.
A Bank of Korea official said, "Alternative investments such as overseas real estate are typically long-term investments with low liquidity, and it is difficult to quickly sell assets even when market conditions worsen, which could lead to accumulated defaults. In particular, securities firms earn profits not only from their own capital investments but also by reselling a significant portion of overseas alternative investments to institutional or individual investors, which could result in related liquidity risks or investor losses." Professor Donghyun Ahn of Seoul National University's Department of Economics also predicted, "If the vacancy rate of commercial real estate increases and its value declines accordingly, a few large securities companies could be shaken."
The risk of overseas bonds, which gained popularity amid the low-interest-rate environment, is also increasing. The spread of COVID-19 has significantly increased overseas corporate debt, and as corporate debt repayment capacity deteriorates, there is a possibility of corporate bond credit ratings being downgraded.
The scale of overseas investments by domestic financial institutions reached 486 trillion won as of the end of June, a 3.8-fold increase compared to 129 trillion won at the end of 2013, when overseas investments began to rise rapidly. In particular, from 2014 to June of this year, 91.8% of the increase in overseas investments was made by non-bank financial institutions (securities firms, insurance companies, and pension funds). The proportion of overseas investments in the assets managed by non-bank financial institutions rose by 11.5 percentage points from 10.3% to 21.8% during the same period. Most of these investments were in overseas bonds and overseas stocks, totaling 210 trillion won and 176 trillion won respectively, while overseas alternative investments such as real estate also reached 100 trillion won.
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