February 13, 2018

IMF issued staff report and selected issues report in the context of the 2017 Article IV consultation with Korea. Directors highlighted that the financial system is sound and macro-prudential policies are effectively addressing financial stability challenges, including from high household debt. They encouraged the authorities to remain vigilant to emerging risks, especially from non-bank financial institutions. Directors considered that the regulatory burden for firms should be eased, especially in the service sector.

The staff report highlighted that the regulatory reforms are strengthening the resilience of the financial system. Capital ratios of banks are well above the regulatory minimum, at 14.8% in 2016. A Basel III capital surcharge on five domestic systemically important banks and a countercyclical capital buffer (CCyB) were put in place in 2016 and will be phased-in gradually. The surcharge will rise to 1% in 2019. The CCyB has not been activated yet. Its maximum size is of 2.5% of risk-weighted assets; however, it is likely to remain low, owing to the slowdown in credit growth. Banking system liquidity is improving, with the loan-to-deposit ratio at 119%. Bank asset quality is good, with a non-performing loan (NPL) ratio of 1.25%. Indicators of financial soundness for non-bank financial institutions (NBFIs) are also strong, although their NPL ratios tend to be higher than those of banks, reflecting the generally lower quality of borrowers. Part of the increase in capital ratios in 2016 was due to lower risk-weights. The supervisory authorities are tightening and harmonizing regulation across different types of financial institutions, which should help contain further migration of credit risk from banks to NBFIs. Rising interest rates could pose a risk to asset quality. Low interest rates have contributed to low NPLs by making repayment easier; however, asset quality could deteriorate with a large hike in interest rates. Stress tests of interest rate increases are essential to assess asset quality and credit risk.

The staff report reveals that the supervisory authorities conduct a range of bottom-up and top-down stress tests for banks at an annual or quarterly frequency. Top-down stress testing, involving common macroeconomic risk scenarios for the financial system, will be extended to NBFIs next year. Bottom-up stress tests are already being applied to individual NBFIs and generally show a high level of resilience. Measures targeting external financing risks of banks have been adjusted as the macro-prudential policy framework was overhauled. In January 2017, substantial reforms of the macro-prudential policy framework targeting external risks were implemented. They included a new currency-differentiated liquidity coverage ratio (FX-LCR) and the abolishing of five existing measures that overlapped with the FX-LCR. A standard Basel III net stable funding ratio (NSFR) is being implemented; making it currency differentiated was considered unnecessary, given that currency mismatch risks are low.

The selected issues report discusses topics related to enhancing the monetary policy framework in Korea; strategy for Korea's fiscal policy in a low-growth environment; Korea's integration into global value chains and external balance; macro-prudential policy and high-household debt; labor market duality in Korea; new minimum wage policy in Korea; and recent trends in financial performance and investment of largest companies in Korea.

 

Related Links

Keywords: Asia Pacific, Korea, Banking, NBFI, Basel III, NPL, Macro-Prudential Policy, Stress Testing, IMF

Related Articles
News

IMF Releases Report on 2019 Article IV Consultation with United States

IMF published its staff report in the context of the 2019 Article IV consultation with the United States.

June 24, 2019 WebPage Regulatory News
News

BIS Report Discusses Regulatory Issues Related to Big Techs in Finance

BIS has pre-released a chapter of the BIS Annual Economic Report; this chapter focuses on the risks and opportunities presented by large technology firms in the financial services sector.

June 23, 2019 WebPage Regulatory News
News

IOSCO Report Examines Liquidity in Corporate Bond Markets

IOSCO published a report that examines the factors affecting liquidity, under stressed conditions, in the secondary corporate bond markets.

June 21, 2019 WebPage Regulatory News
News

FED Publishes Results of the 2019 Stress Tests for Banks

FED published a report presenting results of the Dodd-Frank Act Stress Test (DFAST) exercise for 2019.

June 21, 2019 WebPage Regulatory News
News

BCBS Report Examines Global Pillar 2 Supervisory Review Practices

BCBS published a report that examines the Pillar 2 supervisory review practices and approaches in Basel member jurisdictions.

June 21, 2019 WebPage Regulatory News
News

IASB Publishes Work Plan and Meeting Updates for June 2019

IASB published an updated work plan and a summary of its June meeting, which presents preliminary decisions of the Board.

June 21, 2019 WebPage Regulatory News
News

HKMA Publishes Banking Exposure Limits Code Under Banking Ordinance

HKMA issued a circular to all authorized institutions informing that the Banking (Exposure Limits) Code has been published in the Gazette on June 21, 2019.

June 21, 2019 WebPage Regulatory News
News

OSFI Proposes Guideline on Internal Model Oversight for Insurers

OSFI proposed the draft guideline E-25 on the internal model oversight framework for federally regulated property and casualty (P&C) insurance companies.

June 21, 2019 WebPage Regulatory News
News

EBA Single Rulebook Q&A: Third Update for June 2019

Under the Single Rulebook question and answer (Q&A) updates for this week, EBA published one answer regarding the calculation of institution-specific countercyclical capital buffer rates.

June 21, 2019 WebPage Regulatory News
News

SEC Finalizes Capital and Margin Requirements for Security-Based Swaps

SEC adopted a package of rules and rule amendments to establish capital, margin, and segregation requirements for security-based swaps, under Title VII of the Dodd-Frank Act.

June 21, 2019 WebPage Regulatory News
RESULTS 1 - 10 OF 3304