BOK raises alarm about financial risk buildup as asset value nears pre-crisis levels

[Photo by Lee Seung-hwan]

South Korea’s asset value has neared the levels running up to the Asian financial crisis of 1997-1998 and global financial crisis of 2008-2009, raising alarm about financial risk building up, a study by the central bank showed.

According to the Bank of Korea, the financial vulnerability index (FVI) - a new indicator measuring long-term financial risk factors based on asset prices, credit accumulation and financial system resilience - reached 58.9, up 17 percentage points in January-March period from 41.9 in the previous quarter. The central bank said the financial vulnerability has been growing rapidly since the outbreak of the Covid-19 virus infection, although it is still below 73.6 during the global financial crisis in 2008.

But the asset price index is rising at a fast clip to 91.7 percent, nearing 93.1 in the second quarter in 1997 amid the Asian financial crisis and 100 in the third quarter in 2007.

[Source: Bank of Korea]

The current level of financial imbalance means that there is a 10 percent chance that the country’s gross domestic product growth contracts by 0.75 percent per year, the central bank estimated. If the imbalance continues for three years, the country would carry a 10 percent chance of GDP contracting by 2.2 percent per year.

Under the scenario, delinquency rate of households and companies increases steeply to 1.18 percent and 2.36 percent, respectively, from 0.83 percent and 1.48 percent based on the default scenario. That could lead to a fall in banks’ capital ratio from 16.5 percent to 11.9 percent and rise in risk weighted assets (RWA) from 0 percent to 2.4 percent, according to the report.

“If the financial imbalance that has been building up so far further expands without being adequately managed, any external or internal shocks going forward could lead to greater financial and economic repercussions,” the central bank said, proposing policy responses to address to financial risk.

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