36.8% Chance of Financial Shock Within a Year... Biggest Risks Are Household Debt and Real Estate

Bank of Korea's H1 'System Risk Survey'
Persistent Current Account Deficit as New Risk Factor

The major risk factors in South Korea's financial system were identified as the high household debt level and repayment burden, real estate market downturn, deterioration of financial institutions' loans and realization of contingent liabilities, and the possibility of large-scale fund withdrawals. Additionally, the likelihood of shocks that could undermine the stability of the financial system within one year significantly decreased from 58.3% in November last year to 36.8%.

On the 3rd, the Bank of Korea conducted a survey from the 5th to the 17th of last month targeting 76 domestic and international financial and economic experts regarding the major risk factors and their likelihood in South Korea's financial system, revealing these results.

Experts cited domestic risk factors for the financial system as the high household debt level and increased repayment burden (53.9%), real estate market downturn (48.7%), and deterioration of financial institutions' loans along with realization of contingent liabilities and the possibility of large-scale fund withdrawals (43.4%).

As for external risk factors, prolonged tightening of U.S. monetary policy (28.9%) was pointed out.

Furthermore, among the major risk factors, risks excluding household debt?such as corporate insolvency risk, deterioration of financial institutions' loans, volatility in domestic financial and foreign exchange markets, current account deficit, and real estate market downturn?were judged to likely materialize in the short term (within one year), whereas risks related to household debt were considered more likely to materialize in the medium term (1 to 3 years).

Compared to the second half survey conducted in November last year, the likelihood of occurrence and impact on the financial system of risk factors were generally assessed to have decreased. However, respondents evaluated the real estate market downturn as a factor with relatively high likelihood and significant impact on the financial system. In the case of deterioration of financial institutions' loans and realization of contingent liabilities with large-scale fund withdrawals, respondents indicated that although the likelihood is low, the impact on the financial system would be significant if they occur.

Meanwhile, regarding the persistence of the current account deficit, it was viewed as having a relatively high likelihood but not a significant impact on the financial system.

Looking at the response rates for major risk factors, household debt risk continued to have the highest response rate following the November survey last year. The response rate for real estate market downturn rose (36.1% → 48.7%), highlighting it as a major risk factor. Conversely, the response rates for increased insolvency risk due to worsening corporate business conditions and financing environment (62.5% → 42.1%) and inflation caused by rising raw material prices and global supply disruptions (34.7% → 22.4%) significantly declined. The persistence of the current account deficit (31.6%) was newly selected as a risk factor in this survey.

The confidence level in the stability of the financial system (over the next three years) slightly increased from 36.1% to 42% for respondents answering 'very high' or 'high' compared to the previous survey. Regarding the financial sectors perceived as most vulnerable to financial fragility, most respondents pointed to non-bank sectors such as savings banks, mutual finance, small and medium-sized securities firms, and capital companies. In particular, real estate project financing (PF) defaults in these sectors were expected to become a major vulnerability in the future.

The Bank of Korea emphasized, "To enhance the stability of South Korea's financial system, it is necessary to strengthen management and supervision of financial institutions' liquidity response capabilities and provide appropriate liquidity support in case of domestic and international financial market instability." It added, "Proactive management of potential risks within the financial system through measures such as encouraging financial institutions to expand loss absorption capacity and conducting stress tests is required." Furthermore, it stated that financial stability should be maintained by operating real estate and interest rate policies from a long-term perspective.

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