Major Risks Identified by Domestic Finance and Economic Experts
Increased Default Risk Due to Deteriorating Corporate Financing Conditions
[Asia Economy Reporter Seo So-jung] The major risk factors in South Korea's financial system were identified as the high household debt level and increasing repayment burden, rising risk of corporate insolvency due to deteriorating financing conditions, concerns over loan defaults and contingent liabilities materializing in financial institutions, among others. Additionally, the likelihood of a shock that could undermine the stability of the financial system within one year sharply increased from 26.9% in May to 58.3%.
On the 27th, the Bank of Korea announced these findings based on a survey conducted from the 2nd to the 9th of this month targeting 72 domestic and international financial and economic experts regarding the main risk factors and their likelihood in South Korea's financial system.
Experts pointed to domestic risk factors in the financial system such as the high household debt level and increasing repayment burden (69.4%), rising risk of corporate insolvency due to deteriorating financing conditions (62.5%), concerns over loan defaults and contingent liabilities materializing in financial institutions (48.6%), a sharp rise in domestic market interest rates (43.1%), and a downturn in the real estate market (36.1%).
As for external risk factors, they cited inflationary pressures caused by rising raw material prices and disruptions in the global supply chain (34.7%).
Among the major risk factors, risks such as rising corporate insolvency risk due to worsening financing conditions, concerns over loan defaults and contingent liabilities in financial institutions, sharp increases in domestic market interest rates, and inflationary pressures from rising raw material prices and global supply chain disruptions are generally expected to materialize in the short term (within one year). In contrast, risks like the high household debt level and increasing repayment burden, as well as the real estate market downturn, are more likely to materialize in the medium term (1 to 3 years) or short term.
Furthermore, a sharp rise in domestic market interest rates was assessed as having a high likelihood of occurrence and significant impact. While the likelihood of occurrence for concerns over loan defaults and contingent liabilities in financial institutions, rising corporate insolvency risk due to deteriorating financing conditions, and real estate market downturn was relatively low, their potential impact on the financial system if they occur was considered substantial. On the other hand, inflationary pressures from rising raw material prices and global supply chain disruptions were seen as having a relatively high likelihood but limited impact on the financial system.
Regarding response rates for major risk factors, the high household debt level and increasing repayment burden rose significantly from 43.8% in the May survey to 69.4%, and the response rate for a sharp rise in domestic market interest rates increased from 33.5% to 43.1%, highlighting these as key risk factors. Conversely, inflationary pressures from rising raw material prices and global supply chain disruptions (79.9% to 34.7%), normalization of major countries' monetary policies (55.4% to 16.7%), and geopolitical risks from the Russia-Ukraine conflict (41.2% to 18.1%) saw sharp declines.
Rising corporate insolvency risk due to deteriorating financing conditions (62.5%), concerns over loan defaults and contingent liabilities in financial institutions (48.6%), and real estate market downturn (36.1%) were newly identified risk factors in this survey.
Confidence in the stability of the financial system over the next three years saw a significant drop, with responses indicating 'very high' and 'high' falling from 53.2% to 36.1% compared to the previous survey. Regarding the financial sectors perceived as most vulnerable to financial fragility, most respondents pointed to non-bank sectors such as savings banks, securities firms, and capital companies. Savings banks are considered vulnerable due to a high proportion of risky borrowers leading to asset deterioration and concerns over defaults in real estate project financing (PF) loans. Securities firms are also evaluated as vulnerable to credit and liquidity risks due to high exposure to real estate PF, raising concerns over contingent liabilities materializing.
The Bank of Korea stated, "A high proportion of respondents emphasized the need for active liquidity supply by financial authorities to prevent market liquidity tightening and strengthen communication with the market to enhance the stability of South Korea's financial system." It added, "Alongside managing asset soundness in financial institutions, there is a call to strengthen stress tests by financial authorities to proactively identify latent risks within the financial system and to adjust the pace of interest rate hikes considering household debt and economic recession."
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