[Editorial] Bracing for backlash from the SVB collapse

2023. 3. 21. 20:29
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The woes in the U.S. and Europe cannot be taken lightly.

The demise of Silicon Valley Bank and smaller banks in the United States has spilled over to Europe to raise alarms about the global financial system. Like in the U.S., financial regulators in Europe moved fast to quench the fire lest it should build up to a major meltdown at the 2008 global scale. But the post-pandemic rapid tightening which hit hard on the weak spots across the global economy has been triggering one crisis after another. We cannot know when or where a shock can blow over next.

Credit Suisse (CS), wobbly for many years from a series of investment failures and scandals, was saved from the brink of bankruptcy. Its Swiss peer UBS Group came to the rescue with backstopping by the government by offering an acquisition in a $3.2 billion deal. The Swiss government and central bank announced the merger with the Swiss National Bank offering more than $100 billion to facilitate the merger and extra liquidity to stabilize the market. The bailout also had the backing of the legislature. The U.S. government and central bank welcomed the news.

The woes in the U.S. and Europe cannot be taken lightly. Unlike American and European institutions, Korean banks mostly earned revenue through lending rather than investing. Although that cannot be desirable, Korean banks could feel more relieved than from investment risks.

Still, the risks can easily hit Korean shores. The secondary financial sector is vulnerable against vast exposure in project financing (PF) which have turned risky due to the slump in the property market. The balance in real estate PF loans at mutual banks totaled 10.7 trillion won ($8.2 billion) by the end of September last year. The loan delinquency rate also was 2.8 percent, sharply higher than 1.2 percent at the end of 2021. The rapid increases in the base rate have worsened the vulnerability in PF.

That’s not all. Household debt amounting to 3,000 trillion won is another ticking bomb for Korea. The household debt ratio is the highest among 31 members of the Organization for Economic Cooperation and Development (OECD) when rent deposits are counted in.

The government and financial authorities must closely examine the weak spots in the local financial system. They should study upping the maximum deposit coverage rate currently capped at 50 million won per depositor, unchanged since 2001. The U.S. has quickly made amendment to make whole coverage of the deposits at SVB to prevent a “systematic risk.” The Bank of Korea plans to raise the collateralization ratio for the contract for difference in loan agreements with banks to 100 percent from current 70 percent. Even the slightest signs of danger must not be overlooked.

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