[Q&A] Bank of Korea: "Concerns over Real Estate PF Not as Large as Past Savings Bank Crisis"

Bank of Korea: "Concerns Over Short-Term Funding Market Contraction Are Minimal"

Lee Jong-ryeol, Deputy Governor of the Bank of Korea, is speaking at the "Bank of Korea 2023 Financial Stability Report Briefing" held on the morning of the 28th at the Bank of Korea press room in Jung-gu, Seoul.
[Image source=Yonhap News]

The Bank of Korea explained that concerns over real estate project financing (PF) defaults in the financial industry, following Taeyoung Construction's workout (corporate restructuring) application, are not as severe as the 2011 savings bank insolvency crisis.

At a press briefing on the Financial Stability Report held on the 28th at the Bank of Korea headquarters in Jung-gu, Seoul, the Bank stated that the current concerns about real estate PF defaults are not as serious as the chain bankruptcy of savings banks caused by PF defaults in 2011.

Kim In-gu, Director of the Financial Stability Bureau at the Bank of Korea, said, "At that time, the savings bank crisis was partly due to bridge loans causing defaults, but now the proportion of savings banks is not high," adding, "Currently, multiple financial institutions are sharing the burden rather than a specific sector, so it is unlikely that only one sector will be shocked."

The Bank of Korea also viewed the possibility of the Taeyoung Construction workout crisis spreading to the financial sector and shrinking the short-term funding market, as it did in the fourth quarter of last year, as low. Lee Jong-ryeol, Deputy Governor of the Bank of Korea, emphasized, "The likelihood of the Taeyoung Construction workout situation affecting financial stability at this time is low," and added, "If instability arises, we will cooperate with the government to take appropriate measures."

On the morning of the 28th, the "Bank of Korea 2023 Financial Stability Report Briefing" is being held at the Bank of Korea press room in Jung-gu, Seoul. [Image source=Yonhap News]

The following are key Q&A excerpts with Deputy Governor Lee and Director Kim.

- Taeyoung Construction has applied for a workout. Is there any concern about liquidity shortages?

▲ There is no volatility expansion in price indicators, volume indicators, or interest rate spreads. It remains to be seen whether today's announcement had any prior impact.

- Is there a possibility that the Financial Stress Index (FSI) will increase due to Taeyoung Construction's workout application?

▲ So far, there has been no significant increase, and practically, we assess that the likelihood of a rise is low.

- There are claims that the creditor group’s operation delayed the PF defaults.

▲ The creditor group is being operated orderly across various projects. It is hard to say it was ineffective.

- If the Taeyoung Construction workout crisis spreads to the financial sector and shrinks the short-term funding market like in the fourth quarter of last year, does the Bank of Korea plan to provide liquidity support?

▲ The possibility of it affecting financial stability at this time is low. If instability arises, we will cooperate with the government to take appropriate measures.

- There are talks within the PF creditor group about extending maturities on the premise of interest rate cuts. If orderly restructuring is underway, why do concerns continue to arise?

▲ There are over 3,000 PF projects overall. A tree with many branches is never free from wind. Since policy authorities and creditor groups cannot grasp everything precisely, unexpected events may still occur.

- How does the real estate PF issue compare to the 2011 savings bank crisis? What are the similarities and differences?

▲ At that time, the savings bank crisis was partly due to many bridge loans maturing and causing defaults, and now the proportion of savings banks is not high. Currently, risks are paradoxically shared among revolving financial institutions on a pro-rata basis. Since financial institutions share the major damages and creditor group agreements are in place, if things go well, it is expected that no specific sector will suffer damage like before.

- For real estate PF to improve, the real estate market must be revitalized, but that leads to an increase in household debt. Since household debt growth and real estate PF stability conflict, which should be prioritized?

▲ Real estate PF itself is related not only to housing construction directly linked to household loans but also to knowledge centers and logistics centers. The policy to gradually reduce the household debt ratio will continue, and measures should be taken each time market contraction factors like PF arise.