BOK "Too Early to Judge Liquidity Bubble... Prepare for Side Effects of Real Economy-Finance Divergence" (Comprehensive)

Bank of Korea 'First Half Financial Stability Report' Briefing Session

On the 24th, a briefing session for the Financial Stability Report (June 2020) was held at the Bank of Korea in Jung-gu, Seoul. From the left in the photo: Chae Hee-gwon, Head of the International General Team; Jeong Gyu-il, Deputy Governor; Min Jwa-hong, Director of the Financial Stability Bureau; Lee Min-gyu, Head of the Stability Analysis Team.

[Asia Economy Reporter Eunbyeol Kim] Although asset prices have risen sharply due to increased liquidity following the accommodative monetary policy stance after the COVID-19 pandemic, the Bank of Korea stated that it is still premature to judge this as a 'bubble.'

On the 24th, Min Jwahong, Director of the Financial Stability Bureau at the Bank of Korea, responded to questions about bubble concerns arising from liquidity worries at the 'June 2020 Financial Stability Report' press briefing, saying, "Due to the increased uncertainty in the domestic economic outlook, it is true that the supplied liquidity has not sufficiently spread to consumption and investment but has flowed into asset markets such as real estate." However, he added, "At this point, it is too early to determine whether it is a bubble or not, and it is necessary to observe the direction."

Director Min explained, "No one can clearly judge whether there is an asset bubble, and regarding the stock market rally including global stock prices, there are conflicting views: some see it as a bubble disconnected from the real economy and fundamentals, while others argue it is based on expectations of a short-term end to COVID-19."

He continued, "As a result of supplying liquidity under the accommodative monetary policy stance, the financing conditions for households and companies have improved, and loans have increased, showing some policy effects." This means that liquidity supply played a role in enabling households and companies in urgent need of funds to borrow money.

However, he added, "I want to emphasize the need to prepare for the side effects that may arise if the financial asset market becomes excessively disconnected from the real economy."

On the same day, the Bank of Korea forecasted in the Financial Stability Report that although the debt repayment capacity of households and companies will inevitably deteriorate due to COVID-19, the financial market is expected to remain stable considering its sound resilience. Deputy Governor Jeong Gyu-il of the Bank of Korea stated, "Even under stress scenarios assuming worsened conditions due to COVID-19, the overall resilience, including banks' capital ratios, is expected to be maintained."

According to the Bank of Korea's analysis, even if the growth rate falls to -3.2%, the capital ratios of most financial institutions are expected to remain above regulatory levels. In the banking sector, if a severe shock occurs, the Bank for International Settlements (BIS) capital adequacy ratio is projected to fall by 2.1 percentage points from the baseline (15.3%) to 13.2%, but it is estimated to remain above the regulatory standard of 10.5%. In the securities sector, the Net Capital Ratio (NCR) is expected to decline from 559.0% to 341.3%, but still exceed the regulatory threshold of 100%.

Deputy Governor Jeong said, "We will actively respond to strengthening credit risk monitoring and deepening liquidity tightening in cooperation with the government, and simultaneously maintain system stability over the medium to long term."

He also emphasized that, considering the recent credit supply situation by policy authorities, a liquidity shock is unlikely to materialize currently, but attention should be paid to changes in the situation. Director Min stated, "In particular, if employment conditions deteriorate to the level of the foreign exchange crisis, debt repayment capacity is expected to decline, and loan defaults will increase." He added, "If the loan shock prolongs, the scale of potential non-performing loans may expand, especially in accommodation and food services."

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