Bank of Korea: "Expansion of Financial Institutions' Capital Securities Issuance Negatively Affects Financial Soundness"

Bank of Korea Releases Financial Stability Report
Outstanding Amount of Capital Securities at 89.4 Trillion Won
Increasing Issuance May Negatively Impact Net Income
Certain Insurance Companies Should Pay Attention to Risk Management

The Bank of Korea emphasized that if the issuance of capital securities by domestic financial institutions expands, it could negatively impact the financial soundness of these institutions, highlighting the need for continuous monitoring.

In the Financial Stability Report released on the 21st, the Bank of Korea stated this regarding the current status and potential risks of capital securities issuance by domestic financial institutions. Capital securities are debt securities recognized as capital under accounting standards.

According to the Bank of Korea, as of the end of last year, the outstanding amount of capital securities issued by domestic financial institutions totaled KRW 89.4 trillion. Banks and bank holding companies had the largest outstanding amount at KRW 62.3 trillion, followed by insurance companies (KRW 17.9 trillion), securities companies (KRW 6.1 trillion), and specialized credit finance companies (KRW 3.1 trillion).

By type of capital securities, hybrid capital securities (KRW 42.6 trillion) and subordinated bonds (KRW 46.8 trillion) each accounted for about half. Banks have been steadily increasing the issuance of hybrid capital securities to comply with leverage ratio regulations. Insurance companies are more actively issuing subordinated bonds, which have lower interest rates compared to hybrid capital securities.

The Bank of Korea pointed out that if early redemption, refinancing, or alternative measures for already issued capital securities are not smoothly executed, it could become a burden factor in managing the capital ratios of financial institutions.

Assuming an extreme scenario where refinancing of all capital securities issued by domestic financial institutions becomes difficult, the capital ratios of insurance companies, which heavily rely on capital securities for capital expansion, declined relatively significantly.

The Bank of Korea explained, "In particular, some insurance companies whose capital ratios fall below the regulatory level (100%) need to pay closer attention to risk management."

Furthermore, if domestic financial institutions expand the issuance of capital securities and interest (dividend) payments increase, it could negatively affect financial soundness through a decrease in net income and retained earnings.

Looking at the interest (dividend) burden ratio of capital securities for domestic financial institutions last year, banks had a burden of 5.7%, while the insurance sector had a higher burden at 9.4%. Notably, some insurance companies recorded pre-tax net losses or had interest (dividend) burden ratios exceeding 20%, indicating the need for monitoring.

The Bank of Korea assessed that, considering the strictness of principal write-down and interest non-payment conditions and generally sound management status, the related risks are currently not significant for domestic financial institutions.

However, since hybrid capital securities have discretionary interest payments, if the issuing financial institution receives recommendations for management improvement or lacks distributable profits, interest payments may be restricted. Therefore, the Bank of Korea explained that selling financial institutions should sufficiently explain these risks to investors.

The Bank of Korea emphasized, "Domestic financial institutions should strengthen efforts to expand capital primarily through common equity capital, and the issuance of capital securities should be used complementarily only when capital expansion through common equity is difficult."

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