"Financial Stabilization Measures with 100 Trillion Won Injection, Difficult to Solve Fundamental Issues"

[Asia Economy Reporter Kim Min-young] An analysis has emerged that the government's financial market stabilization measures are unlikely to fundamentally resolve the current issues.

On the 24th, the government judged that the ripple effects of the novel coronavirus infection (COVID-19) crisis could spread beyond the real sector to a global economic crisis. To minimize the impact, it decided to provide funds totaling 100 trillion won, including 58.3 trillion won for the real sector and 41.8 trillion won for the financial market.

On the 26th, Kiwoom Securities researcher Seo Young-soo stated in a report, "This crisis is a complex one combining a real sector crisis and a financial crisis, as well as domestic and overseas (global) crises, different from the 2008 crisis as the government assessed. It is not COVID-19 that triggered the crisis, but losses caused by domestic financial companies' excessive investment in high-risk overseas assets, their negligence in liquidity management, and the government's and banks' postponement of corporate and household debt restructuring. Nearly half of companies have an interest coverage ratio below one, and household debt risk is the highest worldwide, with COVID-19 acting as a trigger."

Seo added, "Contrary to market expectations, the government's current policy is judged to be insufficient to fundamentally resolve the current problems. Therefore, it is expected that the stability of bank sector stock prices will be difficult to anticipate under the current circumstances."

He cited the lack of incentives for policy support through banks as a reason for its ineffectiveness. Seo explained, "Until recently, banks were typical private financial companies criticized for pursuing excessive profits. In this situation, the government demanded banks to defer not only principal but also interest repayments for high-risk borrowers (vulnerable borrowers) and to provide new loans at near-negative margins. It also required banks to make large-scale investments in bond market stabilization funds and stock market stabilization funds. Expecting banks to support the government’s intentions while bearing losses in a situation where nearly half of companies are marginal is overly optimistic."

He also expressed concern, saying, "Although the government judged the current situation as a serious crisis, policy support is being provided through banks rather than fiscal resources, expressing the will to save companies, self-employed individuals, and individuals alike." He pointed out, "If the situation is as severe as the government assesses, considering banks' fragile capital capacity, it will be depleted early. Moreover, indiscriminate support as the government demands could increase non-performing loans and potentially deepen the crisis for banks."

To resolve these issues, he suggested increasing lending capacity. He said, "It is necessary to sufficiently increase lending capacity by supporting or inducing capital increases not only in policy banks but also in private banks. Simply raising the Basel International Settlement Bank (BIS) ratio by changing standards could lose market trust and induce financial instability." Furthermore, he recommended, "The government should minimize price (interest rate) intervention in banks to allow efficient resource allocation through price functions and credit evaluation." Through this, marginal companies should be supported by restructuring and fiscal measures, while banks should support companies facing temporary liquidity shortages.

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