Lee Bok-hyun, Financial Supervisory Service Chief: "PF Securities Receiving Funding Must Avoid Moral Hazard"

Government and Financial Authorities to Support Market with 50 Trillion Won+α
In Response to Concerns Over Risky Business Practices Repeating with Large-Scale Support
Lee Bok-hyun: "Securities Firms Receiving Liquidity Support Must Also Take Responsibility"
"If Risk Management Is Neglected Due to Short-Term Performance Obsession, Responsibility Will Be Clearly Defined"

[Asia Economy Reporter Song Seung-seop] Lee Bok-hyun, Governor of the Financial Supervisory Service (FSS), emphasized, “We will thoroughly manage the implementation of self-rescue plans so that securities firms receiving liquidity support can take responsibility themselves, thereby preventing moral hazard.”

At a press briefing with foreign journalists held on the 7th at the FSS office in Yeongdeungpo-gu, Seoul, Governor Lee responded to concerns that “providing large-scale liquidity support to securities firms through bond market stabilization measures could lead to a recurrence of risky business practices in the industry,” stating, “The measures are not intended to resolve risks of securities firms excessively holding real estate project financing (PF) assets.”

The financial authorities recently announced liquidity support for securities firms facing difficulties in short-term funding due to the downturn in the real estate construction market and the Legoland incident. The government support scale is 50 trillion won plus alpha, starting with the purchase of commercial paper (CP) and asset-backed securities (ABS) through the Bond Market Stabilization Fund. Nearly 1 trillion won has been supplied to small and medium-sized securities firms. From this week, a securities industry project financing (PF) asset-backed commercial paper (ABCP) purchase program will be launched.

There have been voices questioning whether providing liquidity with taxpayers’ money to financial companies that have earned profits through high-risk methods might stimulate moral hazard. Governor Lee stated, “Liquidity is being supplied for market stabilization purposes to securities firms that may experience temporary liquidity shortages due to short-term financial market deterioration,” adding, “We plan to reorganize risk management systems to prevent excessive concentration of risks in specific sectors such as real estate exposure.”

He further declared, “We will clearly hold accountable institutions that neglected risk management by focusing only on short-term performance to prevent moral hazard and adverse effects caused by overly profit-driven operations.”

Governor Lee also announced, “We have inspected real estate exposures across all financial sectors and particularly guided the strengthening of soundness and liquidity risk management centered on the secondary financial sector. We will continue to conduct thorough inspections of risk factors in securities firms and business sites with large exposures.”

He added, “By expanding communication with relevant authorities and the market, we will normalize distortions in fund supply caused by market concentration and ensure smooth funding support for sound business sites. We will also tighten potential risk management so that recent short-term financial market conditions related to real estate PF do not affect the soundness of financial companies and secure sufficient loss absorption capacity.”

Interest Rate, Exchange Rate, and Debt Risks Are “At a Good Level and Manageable”

Regarding recent difficulties observed in short-term funding markets, Governor Lee mentioned, “We judge that there is no liquidity problem across the entire financial system.” He explained, “Liquidity is selectively supported only for specific sectors such as securities firms experiencing temporary difficulties. Through temporary market stabilization measures, we are responding to ensure that financial intermediation functions smoothly, mainly through banks.”

He also expressed that there is no problem with the decline in domestic banks’ capital ratios due to recent interest rate hikes or the significant increase in foreign currency liabilities caused by sharp exchange rate fluctuations. Governor Lee said, “The total capital ratio is currently maintained at a good level, with all banks significantly exceeding regulatory requirements. Risk management such as foreign currency position management and exchange rate hedging is in place, so the impact of exchange rate fluctuations on banks’ soundness and profitability is limited.”

In response to criticisms that Korea’s household debt is large relative to GDP and that borrowers’ burdens are increasing due to rapid interest rate hikes, he rebutted, “The financial authorities and government are preparing support measures for vulnerable borrowers, such as the New Start Fund, to alleviate interest burdens during the rapid interest rate increase period. Korea’s household debt surged sharply in 2020 due to COVID-19 financial support and asset price increases, but the growth trend has stabilized since the second half of last year.”

Governor Lee added, “Considering that Korea’s household debt relative to GDP is higher than major countries and the proportion of variable-rate loans is also high, we are expanding safety nets such as support for vulnerable borrowers directly affected by interest rate hikes. Given the soundness of the banking sector, Korea’s household debt level is sufficiently manageable.”

Regarding concerns about principal losses on derivatives due to the sharp drop in Hong Kong stocks, he responded, “Most maturities are due from 2024 onward, so the possibility of large-scale losses in the short term is low.” He added, “Currently, securities firms are appropriately preparing for potential margin calls by expanding foreign currency funds and establishing foreign currency funding contingency plans.” He also said, “If the index decline continues, we will strengthen monitoring to prepare for possible investor losses and continuously check securities firms’ foreign currency liquidity holdings and foreign currency funding contingency plans.”

He further stated, “Another task for the financial authorities is to establish an institutional foundation to create a favorable environment for foreign investment in the Korean financial market.” He promised, “We will enhance the global consistency of the Korean financial market and expand its scope through regulatory rationalization such as improving foreign investment systems.” He mentioned, “We will take this as a good opportunity to improve unreasonable factors and the overall structure of the Korean financial market so that it can be an attractive market from the perspective of the global financial industry.”

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