[Q&A] Bank of Korea: "Rapid Price Fluctuations in Crypto Assets May Cause Significant Losses... Investors Should Exercise Caution"

On the 22nd, the Bank of Korea Publishes the '2021 First Half Financial Stability Report'

[Asia Economy Reporters Eunbyeol Kim, Sehee Jang]"Individual investors need to be cautious in investing because they can suffer significant losses due to the rapid price fluctuations of crypto assets."

Park Jong-seok, Deputy Governor of the Bank of Korea, stated this on the 22nd during a press conference held after announcing the '2021 First Half Financial Stability Report.' Deputy Governor Park added, "Although the loan exposure related to corporate investments in crypto assets is quite small, the risk likelihood is increasing due to price volatility, so vigilance is necessary."

In the Financial Stability Report released that day, the Bank of Korea estimated the market capitalization of the domestic cryptocurrency market at 50 trillion won and assessed that the impact of a sharp price drop on the domestic financial system would be limited. The Bank of Korea cited the limited exposure of financial institutions to the cryptocurrency market as the reason for this limited impact. The market capitalization of stocks related to crypto assets was 3.7 trillion won, which is only 0.1% of the total domestic listed stocks valued at 2,655 trillion won.

The following is a Q&A session with Deputy Governor Park and Director Lee Jung-wook of the Financial Stability Bureau.

▲Is there a possibility that financial vulnerabilities will increase to levels comparable to those during the global financial crisis in the coming years?

=Last year, asset prices rose rapidly, and the pace of credit growth accelerated significantly, causing the financial vulnerability index to rise sharply. Cautiously, it is likely that the financial vulnerability index will remain at a high level for some time. Although the government's housing market stabilization policies and macroprudential strengthening policies may somewhat slow this down, the current high level of financial vulnerability is expected to persist. However, this may change depending on the future pace of financial imbalance accumulation and economic growth trajectory. It is difficult to say that the economy will head into a crisis solely because of the financial vulnerability index itself.

▲Can it be said that the basis for normalizing interest rate levels has been established?

=Interest rate policy must comprehensively consider economic and inflation conditions. Recently, if steady growth continues, we have conveyed the message that it will be necessary to orderly normalize accommodative monetary policy at an appropriate time in the future. This stance remains unchanged.

▲You evaluated that the longer a company's vulnerable state lasts, the higher the probability of default. Does this mean restructuring should be undertaken?

=Due to the impact of COVID-19, it is difficult to identify companies subject to restructuring. While hastily pushing restructuring has some benefits, it also has negative aspects. Companies temporarily vulnerable to liquidity can survive again if supported. If not handled carefully, difficulties could worsen even for these companies, so a cautious approach is necessary.

▲Why do you see the negative impact as not significant despite the considerable scale of crypto assets?

=It is difficult to set standards such as 'small' or 'large' for the size of the financial market, but it means that it is smaller than the total stock market capitalization of 3,000 trillion won. Also, corporate loan exposure to crypto asset investments is quite small. The rapid price volatility occurring in the crypto asset market appears to be the result of excessive risk-taking behavior. Individual investors can suffer significant losses due to rapid price fluctuations. Individual investors should be cautious when investing.

▲Why was the issuance of 2-year bonds reduced and 3-year bonds issued? You newly introduced 3-year Monetary Stabilization Bonds; will the market absorb them well?

=You can think of it as an effort to expand liquidity adjustment tools. When liquidity absorption is needed in the future, having various maturities will be useful for liquidity management. We decided to issue 3-year bonds while monitoring the supply and demand situation of government bonds. Sometimes we issue 1-year bonds, and sometimes 3-year bonds. We aim to do this in a way that minimizes the impact on the bond market as much as possible.