Higher Soundness and Strong Resilience... Comparing with the 'Jeochuk Bank PF Incident'

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Ongoing Concerns Over Financial Crisis Triggered by Real Estate PF Market

As the liquidity crisis surrounding the real estate project financing (PF) market continues into the new year, a chill is sweeping through the financial markets. Although the scale of defaults is still relatively small compared to the 'Savings Bank Crisis' triggered by massive PF defaults 10 years ago, unlike back then, current market interest rates are high and housing prices are sharply declining, raising concerns that a future PF-driven financial market crisis could spread uncontrollably. On the other hand, since all financial sectors currently maintain capital adequacy ratios above regulatory requirements, the resilience to overcome defaults is considered stronger than in the past.

At a seminar hosted by the office of Yoon Chang-hyun of the People Power Party on the 4th, Lee Jung-wook, Director of Financial Stability at the Bank of Korea, compared the 2011-2013 Savings Bank Crisis with the recent real estate PF market crisis in this way. Financial authorities maintain that considering banks' strong loss absorption capacity and external soundness, the likelihood of escalation into a large-scale crisis is low. However, many in the market believe it is too early to be reassured, given that the size of PF asset-backed commercial paper (PF-ABCP) maturing this month alone reaches 17 trillion won.

In particular, some in the financial sector express concerns that if the real estate PF market crisis intensifies, a 'second Savings Bank Crisis' could be repeated. According to data analyzed by the Bank of Korea on this day, while the severity of financial institution defaults is better now than during the 2011-2013 Savings Bank Crisis, most factors such as housing market conditions, market interest rates, and market structure show more recent risk factors.

The 2011 Savings Bank Crisis occurred when savings banks aggressively extended PF loans fueled by a booming real estate market but fell into massive defaults due to economic downturn following the 2008 global financial crisis, spreading the crisis throughout the financial market. The structure is similar to the current situation. After this crisis, financial authorities significantly strengthened supervision and regulation, resulting in capital ratios across all financial sectors exceeding standards, although overall market conditions are worse.

The Bank of Korea explained, "The significant increase in the scale of real estate corporate finance, combined with rising interest rates and a steep decline in housing prices, are factors that increase the risk of defaults in real estate corporate finance." In fact, during 2011-2012, the base interest rate rose to 3.25% before gradually declining, but recently, due to the Federal Reserve's strong tightening, the base rate is likely to rise to 3.5-3.75%.

Accordingly, the rapid decline in housing prices compared to the past is further fueling instability in the PF market. Many in the real estate market expect continued house price declines this year amid high interest burdens. If housing demand weakens, unsold inventory will increase and yields will fall, making it difficult for financial institutions to recover loans.

In particular, the increased linkage between the capital market and real estate PF loans amid intensified risk-averse behavior following lessons learned from the past Savings Bank Crisis raises the possibility of a crisis. Ten years ago, the linkage between PF and the money market was low and the actual maturity of products was long, ranging from 1 to 3 years, but recently, PF-ABCP has increased significantly and maturities have shortened to 1 to 3 months, increasing funding risks.

The PF-ABCP maturing this month, including asset-backed bonds, amounts to about 17 trillion won, with about 10 trillion won maturing next month and about 5 trillion won in March. The concentration of maturities in the first half of the year is due to refinancing PF-ABCP in October-November last year, when financial market crisis concerns were high, shortening maturities from around 3 months to 1-2 months. The Bank of Korea emphasized, "The expansion of exposure in the non-bank sector, which has relatively weaker capital, is also a risk factor that must be noted."

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