The FSC and the FSS held a joint meeting this morning to monitor and preemptively respond to internal and external risk factors in financial markets amid rising possibility of the Fed’s rate hike at the upcoming FOMC meeting next week.
RECENT FINANCIAL MARKET CONDITIONS
Externally, stock and bond markets in both developed and developing economies are sluggish as investors remain risk-averse ahead of a possible rate hike this month. Internally, growing uncertainties over the global economy increase volatility in domestic financial markets with net selling of stocks by foreign investors and increased appetite for safer assets.
Meanwhile, monetary policy divergence among the world’s central banks will widen with the ECB’s further monetary easing last week and the Fed’s possible increase in the U.S. interest rates next week, which are likely to increase global market volatility.
The FSC will keep domestic risk factors in check so that such risks in combination with external factors should not heighten anxiety among market participants.
OVERVIEW OF KOREA’S FINANCIAL SECTOR SOUNDNESS
Financial institutions across the sector maintain soundness in their capital adequacy and asset quality. It is unlikely that internal and external risks – e.g. increases in U.S. interest rates or corporate restructuring – undermine the soundness of the financial system.
Capital adequacy ratios of financial institutions across the sector have quite improved compared to those at the time of the 2008 global financial crisis to have a greater buffer against external shocks. As of the end of September 2015, financial institutions’ capital adequacy ratios are 2 to 3 times higher than regulatory minimum requirements.
Banks’ loan loss coverage ratios, likely to be affected by corporate restructuring, stand at 133.1% as of the end of September this year, which is enough to absorb losses from bad loans.
* Ratios of loan loss provision to substandard loans(SBLs): 120.5% (2013), 124.0%(2014), 133.1% (Sept.2015)
Stress tests by the FSS on each sector found that financial institutions have capacity to maintain appropriate levels of capital adequacy and liquidity in case of internal and external shocks. The FSS will conduct stress tests on a regular basis to closely monitor financial institutions’ capability to buffer a possible shock.
The FSC will also continue our effort to introduce the macroprudential framework of domestic systemically important banks(D-SIBs) and countercyclical capital buffer to strengthen soundness in the financial system.
FINANCIAL SOUNDNESS IN THE NON-BANKING SECTOR
The soundness of non-banking financial institutions has continuously improved since 2012.
CORPORATE BOND MARKET CONDITIONS & POLICY DIRECTION
Corporate bond market has recently weakened with shrinking demand and surging corporate bond spreads, which is attributable to a combination of several factors such as the wait-and-see attitude of institutional investors ahead of Fed’s rate increase, the effects of book closing at the end of the year and uncertainties over corporate restructuring. However, market participants generally view that the recent weakness is unlikely to lead to a prolonged slump or credit crunch in corporate bond market.
The government will complete corporate restructuring in a speedy manner to reduce credit risk-related uncertainties in corporate bond market. We will also boost institutional investors’ demand through a pool of private pension funds, while easing regulations to further stimulate investments in corporate bond market.
* Please refer to the attached PDF for details.