Experts say “Drastic reduction in likelihood of financial crisis within one year”

Experts say 

“Drastic reduction in likelihood of financial crisis within one year”

Responses that possibility of short term shocks is “(very) high”

dropped 21.5bp within 6 months

Domestic and foreign finance and economy experts judge the possibility of the occurrence of a shock in the domestic financial system within one year to have diminished greatly compared to the second half of last year.

According to the results of the survey on system risk for the first half of 2023, which the Bank of Korea revealed on May 3, in regard to the question of the likelihood of the occurrence of a short term shock within one year which could result in a crisis in the financial system, the share that responded “very high” or “high” was 36.8%, which was 21.5bp lower than that of November of last year (58.3%).

The response to the possibility of a mid-term (1 to 3 years) shock was also lower than that of November of last year. The share that responded “very high” or “high” dropped 6.1bp from 40.3% to 34.2%. In contrast, the share of respondents that responded “very high” or “high” about the reliability (for the next three years) of the stability of Korea’s financial system grew 5.9bp from 36.1% to 42.0%.

In addition, domestic and foreign finance and economy experts chose “a high level of household debt and increase in repayment burdens” (53.9%) as the greatest risk (based on frequency measured by number of responses) in the current Korean financial system. This was followed by “stagnation of the real estate market” (48.7%), “increase in financial institutions’ Non-Performing Loans and contingent loans; possibility of large-scale deposit withdrawals” (43.4%), etc. Overseas risk factors took up the lowest share (frequency of responses), such as “lengthening of period of U.S. monetary policy tightening” (28.9%).

Notably, the response rate to “stagnation of the real estate market” rose 12.6bp from November of last year (36.1%), and stood out as a major risk factor. However, the “increase in risk of non-performance due to corporate industrial situations and deterioration in financing conditions” dropped from 62.5% to 42.1%, while “inflation pursuant to rise in price of raw materials and difficulties in global supply” dropped from 34.7% to 22.4%. “Ongoing current account deficit” (31.6%) was added as a new risk factor for this recent survey.

For the financial industry, where future vulnerability is judged to surface most conspicuously going forward, experts focused on the non-banking sector, such as savings banks, mutual finance, small and medium securities firms, capital firms, etc. Notably, non-performance of real estate Project Financing is predicted to be the major factor for weakness in that sector in the future.

In response, experts called for 1) strengthening of management and supervision regarding liquidity response ability of financial institutions, and provision of appropriate liquidity upon occurrence of financial market instability; 2) encouragement of expansion of loss absorption ability of financial institutions and stress tests for preemptive management of potential risks within the financial system; and 3) maintaining financial stability by managing real estate and interest rate policies from a long term perspective.

This survey was conducted by the Bank of Korea from April 5-17, targeting 76 domestic/foreign finance and economy experts in financial institutions, research centers, universities and foreign investment banks.

(Provided by Newsys)