Financial Services Commission "Regularization of Crisis Response Programs for Stocks, Bonds, and Foreign Exchange"

Expansion of Liquidity Support Programs for Non-Bank Sector

Private Expert Meeting on Financial Industry Risk Response on the 18th

[Asia Economy Reporter Sim Nayoung] Vice Chairman Kim Soyoung mentioned at the 'Private Experts Meeting on Financial Industry Risk Response' held at the Seoul Government Complex on the 18th that in preparation for increased volatility in the financial markets, it is necessary to regularize crisis response programs for the stock, bond, and foreign exchange markets. This refers to measures such as implementing the Stock Stabilization Fund, Bond Stabilization Fund, short-selling restrictions, and strengthening position limits on index futures and government bond futures when stock indices and bond yields fall below or rise above certain levels.

She also stated the need to expand liquidity support programs for the non-bank sector. While the Bank of Korea Act limits securities traded in the open market to government bonds and monetary stabilization bonds, the U.S. Federal Reserve and others expand the eligible securities for purchase during crises to include government-guaranteed bonds, commercial paper (CP), and asset-backed securities (ABS).

Vice Chairman Kim said, "Risks such as the realization of latent non-performing assets, deterioration of funding conditions, and decline in asset values are a concern in the financial industry sectors including banks, insurance, and securities," adding, "We will pay special attention to ‘unexpected new risks,’ ‘accumulation of risks,’ and ‘increased interconnectivity among sectors’ when monitoring and responding to financial industry risks."

She emphasized, "Financial risks often manifest through new channels not considered in existing supervisory systems, so it is necessary to diversify monitoring focus and proactively manage emerging risks. If financial market uncertainty persists for a considerable period, issues that seem minor now may accumulate over time and develop into major risk factors, so monitoring with a long-term perspective is essential."

She stressed, "Given the recent expansion of interconnectivity among sectors, it is also important to consider the possibility that shocks occurring in vulnerable sectors may spread across sectors." Inter-sector transactions in the financial industry totaled KRW 3,191 trillion as of September last year. Transactions among non-bank sectors amounted to KRW 1,906 trillion, and transactions between banks and non-banks were KRW 1,137 trillion.

She continued, "Financial market risks are increasing due to factors such as credit risk of low-credit companies amid interest rate hikes and the possibility of a chain default risk in major emerging countries," adding, "attention is also needed to risks such as the rapid increase in real estate project financing (PF) defaults centered on the non-bank sector, short-term funding market tightening due to rising CP rates, and foreign exchange loss risks caused by exchange rate fluctuations."

Lee Hyukjun, Head of Financial Evaluation at NICE Credit Rating, who attended the meeting, said, "Credit risks are expanding in sectors such as securities, capital, and savings banks," and added, "there is a need to strengthen liquidity support mechanisms to prevent temporary liquidity risks of financial companies during rapid interest rate hikes and real estate market normalization," further stating, "additional measures such as the Financial Stability Account currently being prepared by the Korea Deposit Insurance Corporation should be considered."

Professor Choi Dongbeom of Seoul National University Business School said, "We must prepare for shocks caused by rapidly increased debt in a low-interest-rate environment," adding, "the asset sale process to reduce debt may cause market liquidity shortages, and increased interest expenses may reduce investment and consumption, thereby deepening the economic recession."

Senior Research Fellow Park Haesik of the Korea Institute of Finance stated, "securities firms should be cautious of profitability deterioration due to declining bond yields and risks of real estate PF defaults, insurance companies, especially those that have increased the proportion of available-for-sale bonds, face concerns over declining asset management returns and RBC ratios, and monitoring is also needed for rising hedging costs and increasing credit risks of vulnerable borrowers," he said.

J.P. Morgan economist Park Seokgil said, "Flexible adjustment of price variables and maintaining macro-policy credibility are key to recovery," adding, "global economic growth is expected to gradually decline until next year but is likely to remain slightly below the long-term average growth rate."

Senior Research Fellow Jung Youngsik of the Korea Institute for International Economic Policy said, "Unlike the past when globalization was progressing, protectionism is rising due to U.S.-China conflicts, so micro and macro responses are needed to prepare for worsening funding conditions and trade balances of export companies," adding, "unlike before, inflationary pressures are high, major countries are rapidly normalizing monetary policies, asset prices are sharply falling, and capital outflows are increasing, so preparations are needed for financial institutions' asset losses, loan defaults, and deterioration of foreign currency liquidity."

Shin Hwanjong, Head of FICC Research Center at NH Investment & Securities, said, "Geopolitical conflicts such as the Russia-Ukraine war and U.S.-China tensions are spreading comprehensively, greatly increasing global political and economic uncertainty," adding, "the restructuring of global supply chains could deliver a significant shock to our export-dependent economy, so it is necessary to strengthen monitoring of external environmental changes."

Kang Seunggeon, Team Leader of KB Securities Research Center, advised, "Proactive responses are needed to concerns about increased insurance contract cancellations due to economic slowdown and excessive competition following the implementation of the new international accounting standard IFRS17," adding, "the securities sector should conduct inspections on mezzanine and subordinated loans in real estate PF loans and check the possibility of increased liquidity risks for securities firms if unsold housing becomes a reality."