Distinguishing Real Estate PF Quality... Strengthening Financial Sector Crisis Response Capabilities

The government is set to begin a thorough evaluation to ensure a smooth landing of the real estate project financing (PF) market, which is considered a critical risk factor for our economy this year. Additionally, it will strengthen the financial sector's crisis response capabilities to prevent systemic risks in the domestic financial market even if crises such as those involving PF arise.

On the 17th, the Financial Services Commission announced this at the 'Public Discussion on Livelihood Issues with the People (Government Work Report)' presided over by President Yoon Suk-yeol at the Korea Exchange in Yeouido, Seoul. This decision is based on the assessment that risks are scattered across the financial sector, including instability in the real estate PF market and an increase in marginal companies, as the real economy and real estate market have been sluggish for an extended period, as revealed in the recent workout (corporate financial restructuring) of Taeyoung Construction.

Accordingly, the authorities will intensify the evaluation process by strengthening support for normal PF projects this year while promoting restructuring for distressed projects. First, when providing financial support such as maturity extensions and interest deferrals through PF creditor group agreements, the business feasibility evaluation of PF projects will be enhanced. This aims to focus support primarily on normal projects.

To resolve distressed projects, the 'PF Normalization Fund' established last year will be allowed to acquire bonds related to PF projects to perform its function effectively. Previously, the PF Normalization Fund purchased distressed PF projects through price negotiations with creditor groups, but going forward, direct acquisition through auctions and public sales will also be permitted. In addition, the Korea Housing Finance Corporation (HF) will diversify its business guarantees related to real estate PF beyond direct loan guarantees to include REITs and funds.

Furthermore, management of real estate PF exposure will be strengthened, and loss absorption capacity will be expanded. For savings banks and specialized credit finance companies, provisions for land-secured loans will be increased to the level of real estate PF loans, and mutual finance institutions such as NongHyup, Suhyup, Credit Unions, and Forestry Cooperatives will raise provision standards related to real estate and construction loans.

In particular, securities companies and real estate trust companies will see revisions to regulations on real estate-related net capital ratio (NCR) and limits to encourage stable real estate investments. Both securities firms and trust companies will apply differentiated NCR risk values based on project stages and loan-to-value (LTV) ratios for real estate investments. Trust companies will also introduce limits on land trusts relative to their capital and standardize internal control standards.

The Financial Services Commission stated, "We will continue to operate a high-intensity monitoring system for the financial market in preparation for potential market instability due to sustained high interest rates and delayed real estate market recovery," adding, "If market instability occurs, we are prepared to immediately and significantly expand the market stabilization measures currently operated at a scale of 85 trillion won."

Meanwhile, the Financial Services Commission will also strengthen the financial sector's crisis response capabilities to prevent the transmission of systemic risks to the financial market even if various crises occur this year. This is in response to conditions where crises in financial firms can rapidly spread to the entire market due to technological advancements, as seen in last year's bankruptcy of the U.S. Silicon Valley Bank (SVB).

Accordingly, the authorities plan to prepare detailed implementation plans for the legalization of the Financial Stability Account and its support targets and methods this year. The Financial Stability Account is designed to proactively provide funds to financial firms facing temporary liquidity crises during emergencies such as financial crises by utilizing parts of the Deposit Insurance Fund. However, the amendment to the Depositor Protection Act containing this provision failed to pass the National Assembly last year.

Additionally, the introduction of a 'special resolution system' for rapid response in case of financial company insolvency will continue to be reviewed. Drawing on cases from the U.S. and the U.K., the activation criteria will be specified as "when a financial firm's insolvency is judged likely to lead to systemic risk," and institutionalization will commence.

Improvements to ensure the stability of the Deposit Insurance Fund will also be pursued. Since the sunset of the deposit insurance premium rate cap extension (0.5%) is scheduled for the end of August this year, an appropriate premium rate will be reviewed, and measures will be prepared to respond to the scheduled termination of the special account for savings banks at the end of next year. The special account for savings banks was established within the Deposit Insurance Fund during the 2011 savings bank bankruptcy crisis to support restructuring.

To prepare for various latent risks, soundness and liquidity management will be strengthened by sector. For banks, stress buffer capital will be institutionalized, and proactive management of non-performing loans will be promoted by encouraging the sale and disposal of delinquent loans. For savings banks, related institutional improvements will be made, such as permitting the third-party sale of non-performing loans of individual business owners.

For specialized credit finance companies, the securitization of rental assets will be allowed to expand funding sources for medium- and low-credit capital companies. For mutual finance institutions, stress testing will be mandated, and management of vulnerable cooperatives related to joint loans in real estate and construction will be strengthened.

Moreover, measures to respond to crisis transmission due to increased interconnectivity between markets will be established. Regarding the rapidly growing non-bank financial intermediation (NBFI), major risk factors will be examined, and institutional improvement plans will be prepared if necessary. Risks related to year-end retirement pension fund movements will also be mitigated through measures such as installment payments of contributions and diversification of maturity for incorporated products.

The Financial Services Commission will also increase the Corporate Restructuring Fund by an additional 1 trillion won throughout the year, enhance linkages between workouts and other systems, and strengthen corporate restructuring capabilities to respond promptly to current corporate restructuring issues.

Taeyoung Construction, which is experiencing a liquidity crisis due to real estate project financing (PF), has applied for a workout. On the 5th, the construction site of Taeyoung Construction's Seongsu-dong development project located in Seongdong-gu, Seoul, has come to a halt. Photo by Jinhyung Kang aymsdream@