Asset Soundness Emergency, Surge in COVID-19 Support Demand... Banks Caught in Dilemma (Comprehensive)

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[Asia Economy Reporter Kim Hyo-jin] As the domestic and international financial markets plunge into chaos due to the novel coronavirus infection (COVID-19) pandemic, 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 companies and small business owners is an urgent task.

According to financial authorities and the financial 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 meeting comes three days after the meeting on the 20th. At this meeting, the banking sector plans to sign an agreement with the Financial Services Commission to contribute at least KRW 10 trillion to the Bond Market Stabilization Fund (Bond Stabilization Fund). During the 2008 global financial crisis, the financial sector jointly contributed to establish the Bond Stabilization Fund, with banks bearing KRW 8 trillion. 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 KRW 10 trillion. Plans include financial holding companies leading the fund-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." Particularly, the Securities Stabilization Fund carries 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 daily. Commercial banks, through practical consultations with the Financial Services Commission and others, will provide KRW 3.5 trillion in secondary interest subsidy loans at ultra-low interest rates (1.5%) 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 effects of policy financial institutions for companies affected by COVID-19.

Extension of loan maturities and deferral of interest payments 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 indemnity measures so that support for companies affected by COVID-19 does not adversely affect banks' capital soundness, management performance evaluations, 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, "The soundness management 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 established 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 also organized an Emergency Management Committee led by Chairman Yoon Jong-kyu, and Hana Financial Group is responding by forming a Crisis Situation Management Council.

Meanwhile, the unprecedented zero (0) interest rate era has triggered alarms for profitability management in the banking sector. As the net interest margin (NIM), a core profitability indicator of commercial banks, deteriorates, a total net income decrease of over KRW 1 trillion is expected this year among the five major commercial banks: Shinhan, KB Kookmin, Hana, Woori, and NH Nonghyup Banks. 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.