Financial Authorities: "Middle East Risk Limited... Strengthening Response for Prolonged Crisis"

Foreign Currency Liquidity and Soundness Remain Favorable
Systemic Risk Spread Considered Minimal
Enhanced Monitoring of Creditworthiness and Profitability Amid Prolonged Uncertainty

As market volatility persists due to instability in the Middle East, financial authorities have assessed that the soundness of the domestic financial industry and foreign currency liquidity remain at a favorable level, and that the impact of rising exchange rates and bond yields on each financial sector is currently limited. However, in preparation for the possibility that the situation may be prolonged, the authorities have decided to strengthen risk assessments related to increases in exchange rates, interest rates, and oil prices, and to enhance monitoring of creditworthiness and profitability deterioration by sector.

Yonhap News Agency

The Financial Services Commission held a "Sectoral Risk Assessment Meeting" on March 19, presided over by Kim Jinhong, Director General of the Financial Industry Bureau. Representatives from industry associations as well as the Korea Institute of Finance and the Korea Insurance Research Institute attended the meeting.

The participants concluded that the overall stability of the domestic financial industry and foreign currency liquidity remains intact, and that the impact of rising exchange rates and bond yields on the soundness of each sector is, so far, limited. They also analyzed that the exposure of Korean financial companies to the Middle East is minimal, making the likelihood of systemic risk spreading quite low.

However, they agreed on the need for proactive measures, as a prolonged crisis in the Middle East could have significant ripple effects on the real economy and the financial industry as a whole. Accordingly, the banking sector has strengthened its emergency response system and is reviewing risk factors related to fluctuations in exchange rates, interest rates, and oil prices on a daily basis. Exposures to oil price-sensitive industries, such as refining, petrochemicals, and aviation, are being continuously managed, while monitoring is also being intensified for the potential deterioration of profitability and credit ratings.

The insurance sector is preparing response plans for various interest rate increase scenarios and working to reduce capital volatility by strengthening duration gap management. The credit finance sector, which mainly raises funds through corporate bonds due to the absence of deposit functions, is closely monitoring bond market volatility and seeking alternative funding sources such as bank loans, asset-backed securities (ABS), and commercial paper (CP). Savings banks and mutual finance institutions are also reviewing their liquidity management measures and contingency plans, while intensifying monitoring of loans to vulnerable groups such as low-income individuals, small businesses, and SMEs, which are highly sensitive to economic conditions.

According to the Financial Services Commission, five banks and three non-life insurance companies currently have operations in the Middle East. Since the Ministry of Foreign Affairs issued a special travel advisory on March 2, all staff have switched to remote work or relocated to alternative offices. The headquarters of these banks and insurance companies have established 24-hour emergency communication systems with their local offices to respond to the situation.

In addition, for vessels operating near the Strait of Hormuz, existing war risk coverage under marine insurance contracts has been canceled and replaced with new contracts. As of now, 32 out of 33 cases have been reinsured. The insurance companies plan to provide enhanced support, including prompt claim payments and timely information on premium changes, in the event of damage.

Kim Jinhong, Director General of the Financial Industry Bureau, stated, "We will comprehensively review potential risk factors, including the impact of increased capital inflows to the capital market on deposits." He also advised, "Since high interest rates and high oil prices impose a greater burden on low-income individuals and small business owners, please closely monitor any funding difficulties and continue to pursue a transition to productive and inclusive finance without wavering."

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