BOK: "Confirmed Crisis Spread Speed Due to SVB Incident... Need to Enhance Crisis Response Capability"

Financial Institutions Must Actively Conduct Stress Tests

[Image source=Reuters Yonhap News]

Following the bankruptcy of the US Silicon Valley Bank (SVB), it has been confirmed that the speed at which crisis situations spread has accelerated rapidly compared to the past. Accordingly, there are recommendations that South Korean policymakers should also enhance their crisis response capabilities. It has been pointed out that active measures such as conducting stress tests on financial institutions, encouraging capital adequacy, and preparing liquidity supply plans are necessary.

On the 21st, the Bank of Korea stated in its Financial Stability Report, "Since mobile and internet financial transactions are active in South Korea due to the development of IT technology, more meticulous responses to vulnerabilities revealed through cases in major countries are required."

The Bank of Korea identified the causes of SVB's bankruptcy as ▲high concentration in specific sectors in terms of funding and operations ▲insufficient supervision and oversight by regulatory authorities ▲bank runs occurring at a faster pace than in the past. In SVB's case, large-scale losses due to a sharp rise in interest rates were inevitable because of its investment solely in government bonds, and its high dependence on large deposits from a small number of venture technology companies made it more vulnerable to bank runs, according to the analysis.

Additionally, since regulations on banks with assets under $250 billion were significantly relaxed after 2018, regulatory authorities failed to conduct adequate supervision and oversight of banks like SVB, which was also pointed out as one of the causes of this incident. The combination of the spread of social media and financial service innovation caused bank runs to proceed at an unprecedentedly rapid pace, making it difficult for policymakers to secure enough time to respond with conventional liquidity supply methods such as the discount window, which further worsened the situation.

Swift and Decisive Actions Contribute to Market Stability... Need to Prepare for Digital Banking Risks

The Bank of Korea emphasized, "In recent crises, policymakers worldwide have been able to achieve their intended goals with less support than initially expected by stabilizing market sentiment early through unprecedentedly swift and decisive measures," adding, "It is essential to actively prepare for extreme stress situations and new risk factors such as digital banking and the activation of social networking services (SNS)."

Furthermore, the report evaluated that although volatility in the domestic foreign currency funding market expanded somewhat immediately after the SVB incident, foreign currency fund inflows and outflows through the banking sector remained stable. Typically, short-term borrowing by the banking sector decreases during crises, but it increased significantly in March. However, in April, as the foreign currency liquidity conditions of foreign bank branches improved, borrowing from head offices was reduced, leading to a decrease in borrowing. Also, foreign bond investment funds continued to show net inflows after March due to increased arbitrage incentives. The Bank of Korea diagnosed, "The foreign currency fund inflows and outflows in the banking sector show a markedly different pattern from the global financial crisis period when domestic foreign currency liquidity conditions deteriorated significantly due to deleveraging by global banks."

It added, "Despite instability in global banks such as SVB, the domestic foreign currency funding market was able to maintain a relatively stable trend thanks to the sound external soundness of the domestic foreign exchange sector, the weakening of the US dollar due to expectations of a relaxation in the Federal Reserve's (Fed) tightening stance, and the rebound in US stock prices. However, in a high-interest-rate environment where trust in the banking industry overall has declined, the possibility of defaults on US commercial real estate loans remains a concern for small and medium-sized banks."