26.9% Probability of Financial System Shock Within a Year... Inflation as the Biggest Risk

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[Asia Economy Reporter Seo So-jeong] The major risk factors for South Korea's financial system were identified as rising commodity prices, inflationary pressures due to global supply chain disruptions, normalization of monetary policies in major countries, and high household debt levels. Additionally, the likelihood of a shock that could undermine the stability of the financial system within one year increased from 12.5% in December last year to 26.9% this month.

On the 30th, the Bank of Korea conducted a survey from the 27th of last month to the 13th of this month targeting 80 domestic and international financial and economic experts regarding the main risk factors and their likelihood in South Korea's financial system. The results showed as such.

Among domestic and international financial institution workers, 34% cited inflationary pressures caused by rising commodity prices and global supply chain disruptions as the top risk factor for the financial system. This was followed by normalization of monetary policies in major countries (15%) and high household debt levels (11%).

When simply counting response frequencies without considering risk rankings (multiple responses allowed for five factors), experts pointed to high household debt levels (43.8%), sharp rises in market interest rates (33.5%), and increased financial market volatility (21.9%) as domestic risk factors for the financial system. For external risk factors, inflationary pressures due to rising commodity prices and global supply chain disruptions were the most cited (79.9%), followed by normalization of monetary policies in major countries (55.4%) and the spread of geopolitical risks due to the Russia-Ukraine conflict (41.2%).

Among the major risk factors, inflationary pressures from rising commodity prices and global supply chain disruptions, normalization of monetary policies in major countries, the spread of geopolitical risks from the Russia-Ukraine conflict, sharp rises in market interest rates, and increased financial market volatility were generally seen as risks likely to materialize in the short term (within one year), while high household debt levels were viewed as a medium-term risk (1 to 3 years).

Furthermore, inflationary pressures from rising commodity prices and global supply chain disruptions, normalization of monetary policies in major countries, and sharp rises in market interest rates were considered highly likely to occur and to have a significant impact on the financial system if they did. However, while high household debt levels were seen as having a large impact on the financial system, the likelihood of this leading to financial instability was viewed as relatively low.

Comparing response rates on major risk factors to the survey conducted in December last year, inflationary pressures rose sharply from 55.4% to 79.9%, and responses citing normalization of monetary policies in major countries (41.9% → 55.4%) and sharp rises in market interest rates (24.3% → 33.5%) also increased, highlighting these as key risk factors. The spread of geopolitical risks due to the Russia-Ukraine conflict and increased financial market volatility were newly identified risk factors in this survey.

When asked about the likelihood of a shock causing a financial system crisis occurring in the short term (within one year), 26.9% responded "high" (very high 1.3% + high 25.6%), an increase compared to 12.5% in the December 2021 survey.

The Bank of Korea stated, "A high proportion of respondents indicated that price stability, stabilization of household debt and the real estate market, and management of financial institutions' asset soundness are urgent tasks to enhance the stability of South Korea's financial system at this time." It added, "There is a need to suppress inflationary trends and lower inflation expectations through efficient monetary and credit policies, including clearly and consistently signaling the reduction of monetary policy easing levels to the market."

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