Bank of Korea "Credit Risk Up Due to SVB Incident... Real-Time Gross Settlement System to Be Established by 2028"

'Iyeon Chaekyeokjeolje' Method Switching to 'Real-time Total Amount Settlement'

[Image source=Reuters Yonhap News]

The Bank of Korea is actively promoting the introduction of a Real Time Gross Settlement (RTGS) system as credit risks related to banks' payment and settlement have emerged following the U.S. Silicon Valley Bank (SVB) incident. The RTGS method completes the final settlement between participating institutions simultaneously with customer fund transfers.

On the 27th, the Bank of Korea stated in its '2022 Payment and Settlement Report' that "following the Financial Services Commission's decision and consultations with participating institutions, it aims to establish an RTGS-based fast fund transfer system around 2028."

Currently, South Korea processes fast fund transfers using the Deferred Net Settlement (DNS) method. While customer-to-customer fund transfers are processed in real time, allowing recipients to immediately withdraw transferred funds, the final settlement between participating institutions through the Bank of Korea's financial network occurs at 11 a.m. on the next business day. This means funds are paid to customers first, and interbank settlement follows.

The Bank of Korea pointed out that "the DNS method carries credit risk, leading to a continuous increase in collateral burdens for financial institutions to manage this risk." According to the Bank, the amount of posted collateral is expected to be about KRW 57.6 trillion by the end of this year and is projected to increase to KRW 82.3 trillion in 2025 when the collateral provision ratio relative to the net transfer limit is raised to 100%.

Since 2015, most major countries have adopted RTGS-based fast fund transfer systems to fundamentally eliminate credit risk. As the global adoption of RTGS-based fast fund transfer systems expands, discussions on cross-border linkage of fast fund transfer services, centered on RTGS, are underway mainly in the U.S. and the Eurozone.

Kim Jun-cheol, Head of the Payment Policy Department at the Bank of Korea, said, "We plan to establish a comprehensive plan for building an RTGS-based fast fund transfer system, including optimal system design and implementation timing, within this year," adding, "Following the Financial Services Commission's decision and consultations with participating institutions, the goal is to build the system around 2028."

Regarding Bank of Korea Governor Lee Chang-yong’s recent remark that if an SVB-like incident were to occur in Korea, the bank run (withdrawal) speed would be "100 times faster than in the U.S.," the Bank assessed that no similar issues have occurred domestically and that a well-established real-time monitoring system is in place.

Lee Jong-ryeol, Deputy Governor of the Bank of Korea, stated, "We have established a monitoring system to respond swiftly to ensure smooth interbank fund transfers amid concerns of rapid withdrawals like in the SVB case," adding, "The system is equipped to handle large fund transfers even during weekends and nighttime."

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