The outstanding balance and delinquency rate of real estate project financing (PF) loans in the financial sector are showing a slight upward trend. However, the authorities assessed that the delinquency rate of real estate PF loans remains stable and the likelihood of it escalating into a systemic risk is low.
On the morning of the 11th, the Financial Services Commission held a meeting to review and communicate on current financial market issues at the Government Seoul Office in Jongno-gu, Seoul, chaired by Vice Chairman Kim So-young. The meeting reviewed the status and risk levels of various issues previously identified as potential risks in the financial market and discussed future response measures.
Officials from the Financial Services Commission and the Financial Supervisory Service attended the meeting, covering topics such as overseas real estate alternative investment risk situations, securities firms' foreign currency liquidity status, retirement pension fund movements, specialized credit finance companies' funding situations, and real estate PF risk conditions.
According to the authorities, the delinquency rate of real estate PF loans in the financial sector stood at 2.42% as of the end of September, up 0.24 percentage points from 2.17% at the end of June, but overall it was assessed to be maintaining a stable condition.
By sector, the decrease in delinquency rate in securities (down 3.43 percentage points) was attributed to risk management efforts such as converting contingent liabilities like securities firms' guaranteed PF-ABCP into loans matching the PF project period and maturity, and writing off non-performing PF loans.
In the case of mutual finance, the delinquency rate increased by 3.05 percentage points, reflecting delinquencies in some large-scale projects. However, considering the capital and provision reserves of the mutual finance sector, it was analyzed that the risk of this expanding into a sector-wide soundness risk is low.
Vice Chairman Kim said, "It is true that the improvement of PF project conditions is slow due to high interest rates and delayed real estate market recovery, but PF exposure of financial institutions is being managed stably, and efforts to improve project viability, such as PF creditor agreements, are underway." He added, "All parties involved in PF projects, including the government, related institutions, private operators, and creditors, should make greater efforts to normalize PF projects."
He continued, "The government is steadily implementing gradual soft-landing measures for PF projects, such as financial supply through Korea Housing Finance Corporation and Housing & Urban Guarantee Corporation (HUG) guarantees for normal projects, and encouraging restructuring for projects lacking viability." He emphasized, "We will continue close monitoring of market conditions to prevent PF risks from spreading throughout the financial system and will also fully strengthen the financial sector's loss absorption capacity."
The authorities also examined the possibility of losses for financial companies in the event of a prolonged global real estate market contraction. Currently, the total overseas real estate alternative investment by domestic financial companies amounts to 55.8 trillion KRW, about 0.8% of their total assets.
The authorities assessed that even if losses from overseas real estate alternative investments expand due to negative shocks such as a global asset price decline, the financial sector can sufficiently respond with its current loss absorption capacity. Even under strict stress conditions, such as a significant additional drop in asset values, the maximum loss for the financial sector next year is expected to remain minimal relative to their capital.
Vice Chairman Kim stated, "While losses from overseas real estate alternative investments are unlikely to trigger systemic risk, individual companies with large overseas real estate exposure may face soundness concerns at the company level." He requested the Financial Supervisory Service to continue closely monitoring loss possibilities and each financial company's response.
He also noted, "There is a tendency for loss cases in some investment projects to be overinterpreted as widespread market insolvency, causing unnecessary anxiety." He urged, "Efforts to provide accurate information to the market to alleviate such concerns should be further strengthened."
Regarding the review of securities firms' foreign currency liquidity, it was judged that even assuming a simultaneous sharp decline in overseas stock indices, the current foreign currency liquidity held by securities firms is sufficient to respond.
Furthermore, since 2021, securities firms have been required to establish emergency plans for foreign currency procurement related to self-hedging of equity-linked securities (ELS), strengthening the foreign currency procurement safety net. Therefore, margin call risks due to overseas stock declines are considered manageable.
For retirement pensions, the average interest rate of principal-guaranteed products confirmed this month was 4.13%, slightly down from 4.32% the previous month, indicating a stable level. There is no sign of high-interest competition for fund acquisition.
Considering the current interest rate environment and expected new retirement pension contributions, the authorities judged that the likelihood of financial market imbalances due to fund concentration or liquidity risks from individual company fund outflows is low.
Regarding funding for specialized credit finance companies, following the Federal Open Market Committee (FOMC) meeting last month, expectations of the end of interest rate hikes and the beginning-of-year effect led to a decline in market interest rates and a recovery in bond investment demand, improving issuance conditions for specialized credit finance bonds.
Considering the liquidity already held by each specialized credit finance company, the scale of maturing operating assets, company-specific funding plans, and somewhat improved bond issuance conditions, the possibility of liquidity risks materializing in the short term is considered limited.
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