Structure of Korean banks buffers SVB aftershocks

The business structure of Korean banks, heavily criticized up until a week ago, is cushioning the side effects of the worst collapse of a U.S. lender in more than a decade.

The Silicon Valley Bank branch office in downtown San Francisco, California, U.S., March 13, [REUTERS/YONHAP]

The business structure of Korean banks, heavily criticized up until a week ago, is cushioning the side effects of the worst collapse of a U.S. lender in more than a decade.

Right until the collapse of startup-focused Silicon Valley Bank (SVB) on March 10, commercial banks in Korea have been the target of criticism by financial regulators for their heavy reliance on interest income in raising record profits.

The regulators demanded the banks diversify their income structure, threatening to add new market players to resolve what they described as an “oligopoly.” One of the solutions reviewed was the introduction of specialized banks similar to SVB.

Contributing to the fall of SVB, once the 16th largest lender in the United States, was a $2 billion loss in its bond portfolio, which was heavily hit by the rapid rise of the federal funds rate that dragged down its value dramatically. It was the largest U.S. bank collapse since 2008.

Signature Bank and Silvergate Capital, which were crypto-friendly financial institutions, also collapsed, sending shockwaves through financial markets that eventually spread to bigger financial institutions like Credit Suisse.

Following the recent turmoil in the industry, Korea's financial authorities say deposit and loan operations by domestic banks saved them from experiencing shockwaves from the SVB collapse.

“Banks’ deposits and loans functioned as a sort of a hedge to the risks of the interest rate” that rose rapidly to tame inflation, said Kim Min-sik, head of the Forecasting Coordination Team at the Bank of Korea. “When interest rates increased, rates for deposits and loans accelerated accordingly, reducing the risks.”

More than 70 percent of outstanding household loans in January were provided at a floating rate rather than a fixed interest rate.

The rate is calculated based on information on funding costs provided by eight domestic banks, including KB Kookmin, Shinhan, Hana, Woori and NongHyup.

“The asset and liquidity structure of domestic financial institutions is different from that of SVB and their fundamental strength is believed to be sufficient enough to endure temporary shocks thanks to their favorable liquidity,” said the Ministry of Economy and Finance on March 14.

Only 18 percent of their assets are securities, while the proportion at savings banks is less than 10 percent. The loan coverage ratio at all banks exceeds 100 percent.

Securities accounted for more than half of SVB’s assets at the end of last year, according to a report from Barrons.

Finance Minister Choo Kyung-ho, center, speaks at a meeting held in central Seoul on March 14. [NEWS1]

Korea’s exposure to an earlier liquidity crisis has also helped reduce the shockwaves.

“Systematic risk isn’t likely to spread in Korea because the government has already announced a number of measures to provide liquidity following the Legoland incident,” said Park Jun-woo, an analyst at KB Securities.

Korea’s money market was rattled last September when the developer of the Legoland Korea theme park defaulted. The situation was aggravated when Heungkuk Life Insurance, Korea’s eighth largest insurer, said it would not redeem $500 million in perpetual bonds.

The liquidity crisis downgraded the credit ratings of real estate developers.

Loans and guarantees from financial institutions to the property market totaled 23.4 trillion won ($18 billion) last year. The Financial Services Commission (FSC) announced earlier this month it will commit 5 trillion won to the real estate market through financial institutions.

“Policy measures for the financial sector in the United States were announced a little later than in Korea,” Park added.

The U.S. government guaranteed all deposit accounts at SVB and Signature Bank. The Fed created a new lending vehicle to help other troubled banks meet customer withdrawals.

To prevent shockwaves from spreading, Korea's financial authorities plan to strengthen regulations on banks.

They will be encouraged to implement measures that raise their bad debt reserves, according to the Financial Supervisory Service on Friday.

The total loss-absorbing capacity of different banks will be preemptively stress tested based on the types of assets they hold.

“To prevent the instability that broke out abroad, like the recent SVB bankruptcy, from spreading to the domestic financial market in a systematic risk, we will strengthen monitoring of elements with potential risks and encourage banks to expand total loss-absorbing capacity, like the introduction of a special loan loss reserves and improving standards for reserving countercyclical buffer capital,” said Kim Young-ju, deputy governor of the FSC.

BY JIN MIN-JI [jin.minji@joongang.co.kr]