[Opinion] The 15 Trillion Won White Swan

It's all about real estate PF. We asked recent probationary recruitment interviewees at this newspaper to name the biggest economic issue lately. The Federal Reserve's rate pivot (policy shift) and real estate PF were by far the most mentioned. Most financial sector people I meet over meals are also worried only about real estate PF.

Real estate PF is indeed a big problem. But that doesn't mean we should tremble in fear and exaggerate the issue.

The current outstanding loans for real estate PF in the financial sector amount to about 165 trillion won (bridge loans 30?35 trillion won, main PF 130?135 trillion won).

Real estate PF is divided into bridge loans and main PF. Bridge loans finance the initial stages such as land acquisition, and once permits and approvals are completed, main PF is raised to repay the bridge loans. Bridge loans are predominantly provided by secondary financial institutions such as securities firms, capital companies, and savings banks. For main PF, which has a certain level of project feasibility verified, banks and insurance companies also join in to accelerate the project. Currently, this process is at a complete standstill.

The main concern is bridge loans. These loans were made based solely on future value before project feasibility was verified (※main PF is at the construction and sales stage after project approval, so the likelihood of failure is low. The industry is not overly worried). If these do not transition to main PF, repayment becomes difficult.

However, with prolonged high interest rates and high costs, bridge loans are turning into ticking bombs. Maturities come due, but extensions occur without recovery. This is partly thanks to financial authorities initiating support measures such as the 'PF Lender Agreement' in April this year.

Lee Hyuk-jun, head of the Financial Evaluation Division at NICE Credit Rating, recently projected in a report that "out of 30 trillion won in bridge loans, at least 9 trillion won and up to 15 trillion won could lead to losses in the financial sector." This forecast is based on the fact that land at the bridge loan stage, when auctioned or sold by public sale, trades at 30?50% below the loan amount.

Everyone is paying attention to when financial authorities will allow the financial sector to request repayment of bridge loans. Generally, this is expected after next year's general election, but if the inflated bubble cannot hold and bursts, spontaneous ignition could occur earlier. In that case, some construction companies will collapse, and lending financial institutions will have to bear losses consecutively.

This is why the financial sector must hurry to increase capital or set aside provisions. Fortunately, financial authorities, having experienced savings bank crises, are buying time by encouraging maturity extensions. Some secondary financial institutions are responding quickly by increasing their loss absorption capacity through capital increases. For example, savings banks reduced their real estate PF ratio relative to equity from 141% at the end of 2022 to 115% at the end of September 2023 (securities from 37% to 35%, capital companies from 95% to 88%).

Recently, Lee Bok-hyun, Governor of the Financial Supervisory Service, said, "Real estate PF insolvency will break out early next year and soon spread to restructuring issues." He can say this because the problem is known and countermeasures are prepared.

Real estate PF is not a 'black swan' event with a low probability of occurrence. Nor is it a 'gray rhino,' 'elephant in the room,' or 'black elephant'?problems that are overlooked or ignored. What remains are 'gray swans' (predictable but difficult to respond to risks) or 'white swans' (risks that occur due to neglect despite prior experience), and it seems closer to the latter. The risk figure of 15 trillion won is large. Still, since it is recognized and there is past experience, it is a risk that can be sufficiently managed. The point is not to exaggerate anxiety and thereby worsen the crisis.