"Monitoring Needed for Stress Tests of Small and Medium-sized Non-bank Financial Institutions"

Kim Yongjae, Standing Member of the Financial Services Commission, Attends Financial Stability Committee General Meeting

The Financial Services Commission announced on the 16th that Standing Commissioner Kim Yong-jae attended the Emerging Markets and Developing Economies (EMDE) Forum and the Financial Stability Board (FSB) plenary held in Basel, Switzerland on the 14th-15th (local time). The FSB is an international organization that promotes financial regulatory reforms for the stability of the global financial system through developing international standards and policy recommendations, monitoring the implementation of international standards, and strengthening cooperation among countries. In Korea, the Financial Services Commission and the Bank of Korea participate in the FSB.

At this meeting, discussions were held on the impact on emerging markets (EMDEs), prospects for global financial stability, insurance resolution regime reforms, virtual asset regulations, and the FSB’s work plan. Regarding EMDEs, member countries pointed out concerns over the high debt levels in emerging markets caused by a decade of low interest rates, and discussed the deepening sovereign-bank nexus and ways to enhance resilience. The deepening sovereign-bank nexus refers to the phenomenon where increasing government debt and expanded holdings of domestic government bonds by banks cause fiscal conditions and bank asset soundness to mutually affect each other, leading to rapid contagion of shocks.

Kim Yong-jae, Standing Commissioner of the Financial Services Commission, is delivering a congratulatory speech at the '2022 Asia Smart Finance Awards Ceremony' held on the 25th at the Press Center in Jung-gu, Seoul. Photo by Kang Jin-hyung aymsdream@

Discussions on global financial stability also continued. Member countries assessed that the resilience of the banking sector is currently sound, while reviewing potential vulnerabilities in the banking sector such as the real estate market. Their analysis indicated that the macrofinancial vulnerabilities could re-emerge as the long-standing low interest rate environment shifts to high interest rates, and that several countries with high levels of private and public debt face the challenge of adapting to high interest rates. Additionally, concerns were raised that the mismatch between leverage and liquidity in non-bank financial intermediation (NBFI), which has expanded credit supply to levels comparable to banks, could exacerbate market shocks.

Furthermore, member countries reaffirmed the implementation of insurance resolution regime reforms agreed upon last year and discussed potential systemic risks in the insurance sector and mitigation measures based on the report by the International Association of Insurance Supervisors (IAIS). They also discussed ways to promote effective implementation worldwide, including in FSB non-member countries, of the "Recommendations on Virtual Assets and Global Stablecoin Regulation" submitted to the G20 in July.

At the FSB plenary, Commissioner Kim stated, "At the plenary in July, it was pointed out that a mismatch between market expectations of future interest rates and the policy stance of monetary authorities could act as a factor increasing financial market volatility, but this has largely been resolved." He added, "However, due to the economic downturn caused by sustained high interest rates, there is a high possibility of repayment failures among vulnerable households and companies burdened with debt under high interest rates, and such risks could spread beyond financial companies to the entire financial system."

He also proposed, "As seen in the case of Silicon Valley Bank (SVB), small and medium-sized banks are not subject to regulations at the level of large banks, which can lead to failures. Therefore, I believe close monitoring, including stress testing of small and medium-sized financial institutions and non-bank financial institutions, is necessary."

Regarding virtual asset regulation, Commissioner Kim emphasized, "As the FSB clearly pointed out, now is an appropriate time to establish regulatory implementation plans related to virtual assets," and stressed, "For promoting the implementation of related regulations across countries, the peer review planned by the FSB must be thoroughly carried out." In addition, he introduced the main contents of Korea’s Virtual Asset User Protection Act and stated that Korea plans to actively participate in more detailed regulatory discussions to be held at the FSB and other forums in the future.

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