"Preparing for the Possibility of Financial Institution Insolvency After COVID-19"

Professor Song Jun-hyung of HUFS "Concerns Over Financial Institution Insolvency Due to Liquidity in Financial Markets After COVID-19"
FSS 'Financial Risk Review' Report

[Asia Economy Reporter Kim Min-young] An analysis has emerged suggesting that the high liquidity in the financial market due to the aftermath of the novel coronavirus infection (COVID-19) could lead to future insolvencies among financial companies.

Professor Song Jun-hyuk of the Department of Economics at Hankuk University of Foreign Studies stated in the summer issue of the quarterly magazine "Financial Risk Review," published by the Korea Deposit Insurance Corporation on the 4th, in his report titled "The Macroeconomic Environment and Deposit Insurance System After COVID-19," that "the liquidity expansion during the process of overcoming the COVID-19 crisis may amplify the leverage effect across the economy and delay restructuring, thereby accumulating inefficiencies within the economy."

The leverage effect is a metaphor derived from the use of a lever to lift objects heavier than the actual force applied. In the recent low-interest-rate environment, it refers to the phenomenon where cheap loans and liquidity enable investment returns that exceed the actual changes in asset values.

Professor Song emphasized, "In the process of normalizing the financial market after COVID-19, it is necessary to prepare preemptive countermeasures considering the possibility that the leverage effect will disappear due to interest rate hikes and simultaneous insolvencies of financial companies may occur." He added, "While macro expansionary policies bring stimulus effects to the overall economy, subsequent interest rate increases for normalization may cause asymmetric adjustments across sectors," and "more individualized and clearly targeted policy measures should be deployed."

He also stated, "In the post-COVID-19 era, it is necessary to consider institutional improvements such as establishing an emergency fund-raising system for the deposit insurance fund, readjusting the scope of deposit protection, and improving the least-cost verification model."

Meanwhile, the Korea Deposit Insurance Corporation included a total of six manuscripts in this summer issue, reflecting recent changes in domestic and international financial environments, including "The Macroeconomic Environment and Deposit Insurance System After COVID-19" and "The Status and Implications of Big Tech Companies Entering the Financial Industry."

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