"Must Prevent Market Collapse"…COVID-19-Induced Financial Chaos Increases Burden on Banking Sector

Chaean Fund, Surge in Demand for Small Business Financial Support
Concerns Rise Over Soundness Management Amid Emergency Profit Control

[Asia Economy Reporter Kim Hyo-jin] As the novel coronavirus infection (COVID-19) pandemic plunges domestic and international financial markets into chaos, the burden on the banking sector is increasing day by day. The pressure to prevent the collapse of the entire market and concerns over deteriorating soundness are simultaneously converging, creating a dilemma. Aligning with the government's comprehensive financial support policy for corporations and small business owners is an immediate task.

According to financial authorities and the banking sector on the 23rd, Eun Sung-soo, Chairman of the Financial Services Commission, will meet with Kim Tae-young, Chairman of the Korea Federation of Banks, and major bank CEOs this afternoon at the Bankers' Hall in Jung-gu, Seoul. This is the second meeting in three days following a meeting on the 20th. At this meeting, the banking sector plans to sign an agreement with the FSC to contribute at least 10 trillion won to the Bond Market Stabilization Fund (Bond Stabilization Fund). During the 2008 global financial crisis, the financial sector jointly contributed to create the Bond Stabilization Fund, with banks bearing 8 trillion won. The purpose was to purchase market bonds and alleviate instability in the bond market.

The banking sector is also expected to make a significant contribution to the Securities Market Stabilization Fund (Securities Stabilization Fund) of up to 10 trillion won. Plans include financial holding companies leading the capital raising and major securities firms assisting. A representative from a commercial bank said, "The uncertainty and volatility in finance and the stock market are much greater than during the 2008 financial crisis, so concerns are quite significant." Especially for the Securities Stabilization Fund, there is the burden of bearing potential investment losses due to further stock price declines.

The financial support burden for small and medium-sized enterprises (SMEs) and small business owners affected by COVID-19 is also expanding rapidly. Through practical consultations with the FSC and others, commercial banks will provide low-interest loans (1.5%) totaling 3.5 trillion won to small business owners and others starting early next month. The financial authorities have also requested commercial banks to refrain from loan recoveries to maintain the liquidity support effect of policy financial institutions for companies affected by COVID-19.

Extension of loan maturities and interest payment deferrals across the entire financial sector for small business owners and others is also a situation where major banks must take the lead. Following recent recommendations from the Financial Stability Board (FSB), financial authorities plan to promote regulatory flexibility on soundness to encourage more active financial support from commercial banks and other banking sectors. The financial authorities intend to actively provide exemption measures so that support for companies affected by COVID-19 does not negatively impact banks' capital soundness evaluations, business performance assessments, or internal performance evaluations of responsible employees.

In other words, all available measures are being considered to unlock the financial support from the banking sector. A senior official from a financial holding company said, "The current situation is an unprecedented crisis, and if the market collapses, finance loses its meaning, so we recognize how important the social responsibility of financial companies is," but added, "Managing the soundness of financial companies, especially banks, goes beyond simply making profits, so the authorities need to present more concrete alternatives to alleviate concerns."

Accordingly, major financial holding companies are minimizing their originally planned business expansion and focusing all efforts on emergency responses such as strengthening internal risk management functions. Shinhan Financial Group has largely put on hold global projects such as expanding overseas branches, which Chairman Cho Yong-byeong has persistently proposed since the end of last year. Instead, the group holds so-called 'C-level meetings' daily at the holding company level to respond to COVID-19.

Woori Financial Group has activated an Emergency Management Committee chaired by Chairman Sohn Tae-seung. They have also created a 'Market Sensing Team,' which has never been formed before, to detect and respond to internal and external crises. NH Nonghyup Financial Group is implementing an emergency funding operation plan centered on NH Nonghyup Bank, including conservative funding management considering the economic downturn and diversification of foreign currency borrowing methods. KB Financial Group has organized an Emergency Management Committee led by Chairman Yoon Jong-kyu, and Hana Financial Group has also formed a Crisis Situation Management Council to respond.

Meanwhile, with the unprecedented start of a zero (0) interest rate era, warning lights have turned on for profitability management in the banking sector. As the net interest margin (NIM), a core profitability indicator of commercial banks, deteriorates, the five major commercial banks?Shinhan, KB Kookmin, Hana, Woori, and NH Nonghyup?are expected to see a total net profit decrease exceeding 1 trillion won this year. According to the Financial Supervisory Service, as of the end of January this year, the delinquency rate on won-denominated loans at domestic banks was 0.41%, up 0.04 percentage points from the end of the previous month. It is widely expected that the situation after February and March, when the impact of COVID-19 spread was fully reflected, will worsen further.

This content was produced with the assistance of AI translation services.