financialfinancial systemic risk management systemic risk ... semiannual report on financial...

FinancialFinancial Systemic Risk ManagementSystemic Risk Management

Korea’s ExperiencesKorea’s Experiences

G20 Conference on Financial Systemic Risk

(September 27-28, 2012, Istanbul, Turkey)

Korea’s ExperiencesKorea’s Experiences

Jun Il Kim Jun Il Kim

Bank of KoreaBank of Korea

I. Systemic Risks of Korea

Key Characteristics Key Characteristics

� Time-varying risks (financial pro-cyclicality) proven

more important than cross-sectional risks

� Triggering shocks are largely of external origin

(e.g., global financial stress, capital flow volatility)(e.g., global financial stress, capital flow volatility)

� Risks are in the private sector and not in the pubic

sector (with strong fiscal soundness and credible

central bank)

� Domestic risks are building up (household debt)

Procyclical and Volatile Capital Flows (1/2)

� Capital volatility a dominant systemic risk factor in

EMEs, and housing prices and credit volatility in AEs

(IMF, Global Financial Stability Report, April 2011)

Capital Inflows to Asia & GDP Growth

Housing Prices in Seoul & GDP Growth

Capital Inflows to Korea & GDP Growth

-10

0

10

20

30

-5

0

5

10

15

00 02 04 06 08 10

GDP Growth (LHS)

Housing Prices(Seoul, RHS)

(%)(%)

Source: BOK staff Calculation Source: BOK, Kookmin Bank

-5

0

5

10

15

20

25

30

35

40

0

2

4

6

8

10

12

14

01 03 05 07 09 11

Capital inflows/GDP(LHS)

GDP growth (RHS)

(%) (%)

-20

-15

-10

-5

0

5

10

-6

-4

-2

0

2

4

00 02 04 06 08 10

GDP Growth (RHS)

Net Capital Flow/GDP (LHS)

(%)

Capital Flows

A

B

Financial Market Volatilities (std. dev*)

Procyclical and Volatile Capital Flows (2/2)

200

250 Short-term debt

Bond

Equity

(Billion dollars)

221.9

0.30

0.35

120

140 Won/Dollar FX rate (LHS)

KOSPI (LHS)

Treasury Bond Yield (3Y, RHS) C

A

(Asian Crisis)

B (Lehman Crisis)

B

* 3-month moving averages

-100

-50

0

50

100

150

97.11~98.3 98.4~08.8 08.9~08.12 09.1~11.6 11.7~11.12

Equity

-21.4

-69.6

101.6

-12.6

0.00

0.05

0.10

0.15

0.20

0.25

0

20

40

60

80

100

97 99 01 03 05 07 09 11

Source: BOK staff calculation

C

(EA Fiscal Crisis)

Over-hedging and ST Debt Net FX liabilities of Banks

120

140

(Billion dollars) ShortShort--term external term external debts debts of of foreign foreign exchange banksexchange banks

120

140

Foreign branches

Domestic banks

(Billion dollars)

External Vulnerabilities Prior to GFC

0

20

40

60

80

100

03 04 05 06 07 08 09 10 11

Net forwardNet forward selling selling of companiesof companies

0

20

40

60

80

100

95 97 99 01 03 05 07 09 11

� Household leverage at historical peak

Build-up of Household Debt (1/4)

� Variable interest rate mortgages (93%)

Household debt-to- disposable income

� Interest only paid, No Principal (78%)

Mortgage Loans, by Interest Rate Type1)

Mortgage Loans, by disposable income

2005 2006 2007 2008 2009 2010

155%

129%

Source : Bank of Korea

by Interest Rate Type1)

Note: 1) As of end-June 2011

Mortgage Loans, by Repayment Type

Source: Seoul metropolitan area home mortgage loan data of 4 major banks

Installment Installment Repayment Loans on Repayment Loans on which principal which principal currently being currently being repaid, repaid, 21.6%21.6%

Installment Installment Repayment Repayment Loans currently Loans currently in grace period, in grace period, 41.1%41.1%Bullet Repayment Bullet Repayment

LoansLoans, 37.3%, 37.3%

Source : Bank of Korea

Mixed Rate 2.4%

Fixed Rate Fixed Rate 4.9%4.9%

Fixed Rate Fixed Rate 4.9%4.9%

Floating Floating Rate Rate

92.7%92.7%

� Increased financial access by households since AC

� Housing boom (albeit milder than observed in AEs)

� Steady decline in interest rate (and inflation)

House Price : Selected Countries Household Debt to Disposable Income

Build-up of Household Debt (2/4)

190 Korea US UK Japan

(%)300 300 (2000Q1=100)

Source : Bank of Korea Source : Bank of Korea

70

100

130

160

190

2004 2005 2006 2007 2008 2009 2010

Korea US UK Japan (%)

50

100

150

200

250

300

50

100

150

200

250

300

2000 2002 2004 2006 2008 2010

Korea US France UK Ireland

(2000Q1=100)

� Housing boom of 2005-08 driven by credit cycle

(with cumulated price increase of more than 30%)

Housing Price Index (Seoul metropolitan area)

Housing Prices & Household Debt Growth Rates1)

Build-up of Household Debt (3/4)

120 (2011.6=100) 12 12 (%) (%)

Note: 1) Year-on-year

60

70

80

90

100

110

2004 2005 2006 2007 2008 2009 2010 2011 2012 -4

0

4

8

4

6

8

10

2003 2004 2005 2006 2007 2008 2009 2010 2011

Household Loans (LHS)

Housing Price (RHS)

Bank and Non-bank Deposit Rates

� Steady decline in interest rates in the 2000s amid

rising prime-age population

Demographic change

Build-up of Household Debt (4/4)

18

20 Bank Time Deposit (5yrs)

Mutual Credit Companies Time Deposit (1yr)

(%) 30%

0

2

4

6

8

10

12

14

16

18

1998 2000 2002 2004 2006 2008 2010 2012

Mutual Credit Companies Time Deposit (1yr)

Mutual Savings Bank Time Deposit (1yr)

Credit Unio Time Deposit (1yr)

Bank Time Deposit (6months-1yr less)

0%

5%

10%

15%

20%

25%

1990 1995 2000 2005 2010 2015 2020 2025 2030

Population Aged 40~54

II. Macroprudential Policy ResponsesResponses

80

90

domestic banks

(Billion dollars)

Currency Mismatches of BanksFX derivatives positions of banks

45

50250

Scale of FX Derivatives Position of Domestic Banks(RHS)

Scale of FX Derivatives Position of Foreign Branches(RHS)

(%) (billion won)

Addressing Capital Flow Volatility (1/2)

0

10

20

30

40

50

60

70

80

09.1Q 10.1Q 11.1Q

foreign bank branches

Announcement (Jun. 10) Ceiling cut

(Jul.11)

Implementation (Oct. 10)

0

5

10

15

20

25

30

35

40

45

0

50

100

150

200

10.6 9 11 11.1 3 5 7 9 11

Scale of FX Derivatives Position of Foreign Branches(RHS)

FX Derivatives ratios of Domestic Banks(LHS)

FX Derivatives ratios of Foreign Branches(LHS)

Addressing Household Leverage (1/2)

LTV DTI

Jun-2003 50~60%

LTV and DTI Regulations: 2003-11 LTV Ratios: A Comparison

116 120

140 (%)

Oct-2003 40~60%

Mar-2004 50~70%

Aug-2005 40%

Sep-2006 40~70%

Jul-2009 50~70%

Apr-2010 50%

Sep-2010 Temporary de-regulation

Apr-2011 Re-regulated

75

61

80 74

64

75

47

0

20

40

60

80

100

Housing Indicators (Seoul area) Before and After Regulatory Tightening1)

Mortgage loans2) House prices3) Housing transactions4)

Addressing Household Leverage (2/2)

1) Comparison between six-month periods before and after strengthening of loan regulations

2) In trillions of won 3) Apartment basis 4) In units of 10,000 * Source: Bank of Korea

III. Macroprudential Policy FrameworkFramework

ExEx--ante Preventionante Prevention

Macroprudential Policy Crisis Management

�� Financial Services Commission (FSC)Financial Services Commission (FSC)

�� Financial Supervisory Service (FSS)Financial Supervisory Service (FSS) �� BOK: BOK: Lender of Last Resort Lender of Last Resort

ExEx--post Resolutionpost Resolution

F