Hwang Sunju, KDI Research Fellow, "Decline in Government Bond Value Worsens Bank Asset Soundness"

Presentation of the paper on 'The Impact of Fiscal Soundness on Financial Soundness'

[Asia Economy Reporter Jang Sehee] An analysis by a government-funded research institute has revealed that as South Korea's fiscal soundness deteriorates and the value of government bonds falls, banks could face a chain reaction of default risks.

Hwang Soonju, a research fellow at the Macroeconomic and Financial Policy Research Department of the Korea Development Institute (KDI), stated on the 9th in the paper titled "The Impact of Fiscal Soundness on Financial Soundness" that "an empirical analysis conducted on banks in 29 advanced countries including South Korea showed that when the sovereign credit default swap (CDS) premium rises by 1%, the bank bond CDS premium increases by about 0.4%."

CDS is a financial derivative product with insurance characteristics that compensates for losses when the issuing country or company defaults, and it is used as an indicator reflecting default risk.

Research fellow Hwang explained, "As of 2020, South Korean banks hold about 40% of the total outstanding government bonds, and the proportion of government bond investments in total bank assets also reaches around 10%."

He pointed out, "Considering that during the European fiscal and financial crisis from 2010 to 2014, the banks in Greece, Spain, Ireland, Italy, and Portugal?which suffered significant damage?had government bond ratios of about 8-9% of total bank assets in 2010, the government bond exposure of South Korean banks is quite high."

He added, "Since banks are major investors in government bonds, they bear the greatest damage from the decline in government bond values caused by weakening fiscal soundness. If the value of government bonds, which account for a significant portion of banks' asset portfolios, falls, the asset soundness of banks deteriorates, potentially triggering financial instability."

In fact, the government bond market has recently shown signs of instability due to a sharp rise in government bond yields (fall in bond prices). On the 8th, in the Seoul bond market, the yield on 3-year government bonds closed at 2.303% per annum, up 6.6 basis points (1bp = 0.01 percentage points) from the previous trading day, surpassing 2.3% for the first time in about 3 years and 9 months.

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