"Possibility of Financial Sector Soundness Deterioration Due to Strengthened Protectionism"

"Banks Should Increase Provisions
to Proactively Respond to Potential Losses"

Since the inauguration of the Donald Trump administration, the trend toward strengthening protectionism has intensified, raising concerns that the soundness of the financial industry may deteriorate and market volatility may increase.

On the 16th, Bunsung Koo, Senior Research Fellow at the Korea Institute of Finance, stated this in a report titled "Implications of Strengthened Protectionism on the Domestic Banking Industry."

According to the report, if global protectionism intensifies and exports slow down, the performance of companies and industries will worsen. As a result, vulnerable companies may become insolvent, damaging the soundness of the financial industry.

In particular, the spread of protectionism changes risk appetite in global financial markets and investment incentives by country, which can also increase volatility in the domestic financial market.

President Donald Trump signed a proclamation imposing a 25% tariff without exceptions on steel and aluminum products imported into the United States, and announced that tariffs on automobiles and semiconductors are also under consideration. On February 13, 2025, export vehicles were waiting to be loaded at Pyeongtaek Port in Gyeonggi Province. Photo by Kang Jin-hyung

Senior Research Fellow Koo emphasized, "The domestic banking industry must prepare mid- to long-term countermeasures for future financial market conditions that may arise from structural changes in the real economy."

He also stressed that banks should identify the impact on their mid- to long-term financial performance based on stress scenarios and establish a response framework to prevent the accumulation of systemic risks.

Specifically, Senior Research Fellow Koo suggested that scenarios regarding increased financial risks of core industries or major companies be developed to secure corresponding loss-absorbing capacity. He also recommended that future-oriented provisioning be policy-driven in connection with potential insolvencies that may arise from the expansion and deepening of protectionism.

Domestic banks are advised to proactively respond by conservatively handling unrealized losses related to household debt and project financing (PF) in real estate finance, while focusing on securing highly liquid foreign currency assets considering the impact of expanded protectionism on foreign currency demand.

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