Bank of Korea chief to regulate the vulnerable non-banking sector

Bank of Korea (BOK) Governor Rhee Chang-yong [Photo provided by BOK]

The central bank in South Korea is considering the implementation of repurchase agreements (RPs) and other ongoing support in the non-banking sector as part of its plan to stabilize the industry through improved supervision and institutional improvements.

Bank of Korea (BOK) Governor Rhee Chang-yong on Monday emphasized the need to focus on liquidity management, with the BOK absorbing large amounts of liquidity from abroad due to its underlying current account surplus, and to be prepared for changes in the current account balance and the size of adequate liquidity.

Amid the rising importance of the non-banking sector, its instability has raised concerns that the current system, which focuses on banks, is unlikely to achieve the goal of financial stability across the national economy.

“Rather than clinging to the successful ways of the past, the BOK should prepare for bold changes to suit the new environment,” Rhee said in a speech to mark the BOK’s 73rd anniversary on Monday. “Under the current law, financial institutions refer to only as banks, but the share of non-bank financial institutions has exceeded banks since the 2000s.”

The share of non-bank receipts in total financial institution receipts has overtaken bank receipts since around 2012.

Currently, the BOK is looking at the risk of failure of both banks and non-bank financial institutions. The RP purchase program, which provides liquidity to the market to prevent financial crashes and bankruptcies, is limited to banks. However, Rhee said that the current system has its limitations as the financial landscape has changed due to the growth of non-banks, such as savings banks.

His concerns are associated with the recent rise in non-bank delinquency rates and growing anxiety. The non-bank delinquency rate stood at 1.75 percent in the fourth quarter of last year, according to data. This was 0.26 percentage points higher than the previous quarter and 0.57 percentage points higher than a year ago. This was because non-banking borrowers with relatively high interest rates became less able to repay in the rate increases. That explains why the Financial Supervisory Service will start inspecting savings banks, credit card companies, capital companies and mutual financial institutions next week to see how they manage overdue debts.

“Commercial banks are healthy and can withstand a sudden bank run, but non-banks could fall into crisis,” said a BOK official.

The BOK is in talks with the government to improve the system to respond to immediate funding needs while also looking for ways to support non-banks within the framework of current laws. This includes adding non-banks in the list of institutions eligible for RP purchases. At a press briefing on the monetary policy direction meeting last month, Lee said he would discuss expanding the target institutions.

“The BOK’s liquidity management has been focused on absorbing large amounts of liquidity supplied from abroad with a fundamental current account surplus,” Rhee said.

The BOK decided to leave the policy interest rate unchanged for a third consecutive month at its meeting last month. Still, central banks in major economies, such as Australia, have followed a pattern of stopping and then restarting rate increases. The Federal Reserve in the U.S. is also expected to keep rates unchanged at its meeting on its upcoming meeting Tuesday and Wednesday before raising them in July.