[Geuman Report] Bank, Insurance, and Securities Firms' Soundness 'Plummets' Amid Inflation and Economic Slowdown

Financial Institutions Face 'Credit Loss'
BOK Warns "Be Aware of Potential Credit Risk for Vulnerable Borrowers"

[Asia Economy Reporter Jang Sehee] It is forecasted that the capital ratios of financial institutions will significantly decline if inflation and economic slowdown occur simultaneously.

According to the "December 2021 Financial Stability Report" released by the Bank of Korea on the 23rd, if the average inflation rate from 2022 to 2023 reaches 4.6%, economic growth rate is 1.0%, and government bond yields are around 4.1%, the capital ratios in the financial sector are expected to decrease.

The Bank of Korea stated, "Under inflation shocks occurring while the economic recovery trend is maintained to some extent, the capital ratios of all sectors exceed regulatory levels," but added, "However, in the case of a combined shock involving both inflation and economic slowdown, credit losses will occur in deposit-taking financial institutions such as banks." Furthermore, it predicted that insurance and securities companies will see a sharp decline in their capital ratios due to market losses.

In fact, for banks, the capital ratio is projected to fall to around 13.2% due to increased credit risk of borrowers caused by rising interest rates and declining growth rates. The capital ratios of securities and insurance companies sharply dropped by 310.1 percentage points and 198.2 percentage points, respectively, due to market losses from stock price declines and credit spread widening.

The Bank of Korea explained, "If domestic and international inflationary pressures continue to increase and market interest rates rise sharply, it could have considerable effects on financial institutions and economic agents," emphasizing the need for "proactive preparation."

Additionally, the Bank of Korea stated, "Deposit-taking financial institutions such as banks should constantly be aware of the possibility of credit risk arising from vulnerable borrowers due to rising market interest rates," and "Insurance and securities companies, which have a high proportion of marketable securities in their assets, should strengthen risk management for exposures exposed to interest rate risk."

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