Financial Institutions' Soundness Declines Amid COVID-19 Response... "Above Standards but Potential Risks Must Be Managed"

[Asia Economy Reporter Eunbyeol Kim] Financial institutions' soundness indicators are gradually deteriorating amid the response to the novel coronavirus disease (COVID-19). Although banks' soundness indicators still exceed the standard levels, they are showing a slow downward trend, raising concerns that managing soundness could become a burden in the future.

According to the "Financial Stability Status" announced by the Bank of Korea last month, the Basel Committee on Banking Supervision (BIS) capital adequacy ratios of commercial banks and specialized banks were 15.515% and 13.72%, respectively, at the end of the second quarter this year, down 0.74 percentage points and 0.69 percentage points from the end of the previous year.

The loan loss provision coverage ratio, which indicates the allowance for loan losses against non-performing loans, increased by 8.8 percentage points for commercial banks and 7.1 percentage points for specialized banks compared to the end of the previous year, reaching 125.1% and 118.9%, respectively. This was due to proactively setting aside provisions amid growing economic uncertainty.

The Liquidity Coverage Ratio (LCR) declined mainly among commercial banks as short-term corporate deposits for liquidity purposes increased significantly. As of the end of July, the LCR of commercial banks recorded 100.1%, down 10.3 percentage points from the end of the previous year. Specialized banks recorded 115%, up 2.7 percentage points from the end of the previous year.

Capital adequacy of non-bank financial institutions generally remained at a sound level, but the loan loss provision coverage ratio declined in some sectors.

As of the end of the second quarter of 2020, capital ratios in all sectors significantly exceeded regulatory requirements. The capital ratio of securities firms rose by 54 percentage points from the end of the previous year to 609.9% at the end of the second quarter this year. Life insurance companies also increased by 8 percentage points to 292.6%. Mutual savings banks (8.2%), credit card companies (18.8%), and savings banks (14.8%) generally maintained levels similar to the end of the previous year.

The loan loss provision coverage ratio continued to decline in mutual savings banks. At the end of the second quarter of 2020, the ratio was 97.8%, down 15.3 percentage points from the end of the previous year.

The loan loss provision coverage ratio of insurance companies rose by 43.5 percentage points from the end of the previous year to 581.6% as of the second quarter. Credit card companies (279.8%, +4.6 percentage points) saw an increase in the loan loss provision coverage ratio due to a decrease in non-performing assets.

The Bank of Korea evaluated the current financial institutions' soundness indicators as sound but emphasized that risk management must continue. A Bank of Korea official stated, "If the real economy's recovery is delayed, the possibility of defaults may increase, especially among corporate loans that surged in the first half of the year," adding, "With the credit loan growth trend expected to continue in the second half, banks may face increased burdens in credit risk management."

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