[Geuman Report] "Savings Banks and Mutual Finance Liquidity Worse Compared to Other Sectors"

Bank of Korea Financial Stability Report
Liquidity Coverage Ratio of Savings Banks at 142.2% and Mutual Finance at 128.8% as of Last Year-End
"Lower Levels Compared to Other Sectors... Need to Strengthen Liquidity Response Capability"

The liquidity coverage ratios of savings banks and mutual finance institutions were found to be lower compared to other financial sectors. It appears necessary to introduce regulations on liquidity ratios for mutual finance institutions to enhance their liquidity response capabilities in the future.

According to the "June Financial Stability Report" released by the Bank of Korea on the 26th, as of the end of last year, the liquidity coverage ratio of savings banks was 142.2%, and that of mutual finance institutions was 128.8%. This is relatively low compared to insurance at 387.3%, securities at 212%, and specialized credit finance companies at 210.5%.

The liquidity coverage ratio refers to the ratio of cash inflows that can be secured relative to the expected cash outflows in a crisis situation. It is an indicator that calculates the cash available through loan maturities or asset sales when short-term cash outflows such as deposit withdrawals and debt repayments occur during a crisis. The Bank of Korea independently estimated this to evaluate liquidity response capabilities under stress conditions.

The differences in liquidity coverage ratios by sector appear to be due to asset composition. Insurance and securities companies hold large amounts of marketable liquid assets available in liquidity crises, and specialized credit finance companies also possess assets that can be liquidated, such as card assets and installment finance assets, resulting in high liquidity coverage ratios.

However, savings banks and mutual finance institutions mainly consist of loan receivables, and a significant portion of these are managed long-term, limiting the scale of liquid assets available in the short term, which results in relatively low liquidity coverage ratios.

Meanwhile, in the first quarter of this year, the liquidity ratio of savings banks rose to 227.3%, and that of mutual finance institutions increased to 99.5%, compared to the previous quarter (192.1% and 76.2%, respectively). On the other hand, the liquidity ratios of securities companies and specialized credit finance companies slightly decreased to 119.2% and 271.1%, respectively, from 121% and 276.7% in the previous quarter. The liquidity ratio of insurance companies rose significantly to 1019.9% due to the expanded recognition scope of liquid assets by supervisory authorities at the end of 2022, up from 998.3% in the previous quarter. The liquidity ratio refers to liquid assets relative to liquid liabilities or liquid assets relative to average three-month insurance payments.

A Bank of Korea official stated, “Although savings banks and mutual finance institutions show liquidity coverage ratios above 100% under stress conditions, their levels are relatively low compared to securities, insurance, and specialized credit finance companies, so it is necessary to further enhance their liquidity response capabilities.” He added, “Due to their nature as deposit-taking institutions, these entities inevitably face maturity mismatches in funding and operations, so they must pay close attention to liquidity risk management.”

He continued, “In the future, financial authorities need to review emergency funding plans of financial institutions and develop refined liquidity monitoring indicators to identify vulnerabilities,” adding, “Financial institutions need to advance their liquidity risk management systems and strengthen liquidity response capabilities through measures such as expanding credit lines for emergency liquidity procurement.”