Financial Research Institute: "Banking Environment Unprecedentedly Unstable, More Provisions Needed"

[Asia Economy Reporter Song Seung-seop] Despite the favorable performance and indicators of domestic commercial banks, a warning message has been issued that the environment surrounding the banking sector is unprecedentedly unstable. This year, advice has also been raised that it is necessary to focus on risk management rather than profitability or growth, and to build up resilience.

On the 28th, Kim Young-do, Senior Research Fellow at the Korea Institute of Finance, stated in the "2022 Banking Industry Outlook and Risk Issues" published in the quarterly Financial Risk Review by the Korea Deposit Insurance Corporation, that "banking industry risk is a gray rhino."

Senior Research Fellow Kim Young-do said, "The cost of loan losses is likely to increase this year compared to last year, but the extent of the increase is expected to be greatly influenced by external factors," adding, "The problem of self-employed individuals, who have become extremely vulnerable, could either collapse all at once with a single trigger or gradually grow like a snowball, so it is by no means a situation to be complacent about."

He cited rising interest rates as a representative risk. Research Fellow Kim Young-do analyzed, "Countries including South Korea and the UK have already preemptively raised their benchmark interest rates," and "Major countries such as the US and the EU, which have not yet raised their benchmark rates, are also expected to do so soon." He advised, "Domestic banks should closely monitor the impact of rising interest rates and shrinking market liquidity on their asset portfolios."

In particular, he expressed concern about losses in the banking sector related to the loan maturity extensions and interest payment deferrals for small business owners and self-employed individuals, policies implemented by financial authorities since early April 2020. Research Fellow Kim explained, "The financial authorities extended the COVID-19 financial support program involving all banks three times, providing a total of 272.2 trillion won as of the end of November last year," adding, "The parts where principal and interest repayments are deferred are highly likely to result in losses for banks." Although the number of deferred interest payments appears relatively small, Kim judged that considering the related principal, it is by no means insignificant.

Research Fellow Kim argued that banks should verify the impact on their soundness as they normalize COVID-19 financial measures through stress tests. He also mentioned the need to establish response strategies for each scenario, select borrowers showing abnormal signs among those classified as normal borrowers, strengthen pre-monitoring, and additionally accumulate loan loss provisions.

Research Fellow Kim emphasized, "Comprehensive efforts are needed not only to secure soundness in response to various external economic factors mentioned earlier but also to secure profitability, future growth potential, and sustainability," adding, "It is a time when sufficient resilience must be built up, such as by additionally accumulating provisions and securing additional capital buffers, to respond to situations where risk factors may occur simultaneously and unpredictably."

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