FinancialFinancial Systemic Risk ManagementSystemic Risk Management

Korea’s ExperiencesKorea’s Experiences

G20 Conference onFinancial 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

250Short-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 homemortgage 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)

190Korea 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

KoreaUSFranceUKIreland

(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

116120

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

8074

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

Financial Stability Policy Framework

Microprudential Policy

�� Financial Supervisory Service (FSS)Financial Supervisory Service (FSS)

�� Bank of KoreaBank of Korea

�� Financial Services Commission Financial Services Commission

(FSC)(FSC)

�� Financial Supervisory Service (FSS)Financial Supervisory Service (FSS)

�� Korea Deposit Insurance Korea Deposit Insurance

Corp. (KDIC): Corp. (KDIC): Deposit Deposit

Insurance and Resolution of FIsInsurance and Resolution of FIs

�� Ministry of Strategy & Ministry of Strategy &

Finance (MOSF): Finance (MOSF): FX Policies FX Policies

and Bailand Bail--outout

Enhanced Access to Enhanced Access to MicroprudentialMicroprudential DataData

Financial Stability Mandate ReFinancial Stability Mandate Re--introducedintroduced

Assessment of Systemic Risk & starting point of Financial Stability Policy Framework

Amendment of BOK Act (31 Aug, 2011)

Greater Role in Addressing Systemic Risk Greater Role in Addressing Systemic Risk

Greater Accountability for Financial StabilityGreater Accountability for Financial Stability

Semiannual Report on Financial Stability (FSR) to National Assembly

Amended Act mandates BOK Access to B/S info of both Banks and Non-Bank FIs

MOU with FSS allowing BOK to Access Wider Range of Microprudential Data

Systemic Risk Assessment Model of BOK

BOK SAMP

� Nonlinear disequilibrium model to capture tail

risks and feedback/threshold effects

� Integrated framework to reflect procyclicality and � Integrated framework to reflect procyclicality and

interconnectedness

� Macro stress test platform

� Evaluate policy effectiveness

� Test vulnerabilities of individual banks

Structure of BOK Structure of BOK SAMP: SAMP: Six Modules Six Modules

Expected Expected Value at Value at

①①①① Macro module③③③③Contagion loss

module⑥⑥⑥⑥Systemic risk

module

⑤⑤⑤⑤Multi period module

THE BANK OF KOREA

12

Macro risk factors

Fundamentalloss

Default contagion loss

Liquidity contagion loss

Expected Expected

lossloss

Value at Value at RiskRisk

Expected Expected ShortfallShortfall

Systemic Systemic Crisis Crisis

ProbabilityProbability

Systemic Risk Indicators

④④④④Liquidity risk module

②②②②Bank loss module

Systemic Risk Indicators from BOK SAMP Systemic Risk Indicators from BOK SAMP

0.5

1

1.5

2

2.5

3Expected Asset Loss Rate

Liquidity Contagion

Loss Contagion

Fundamental Loss

10

15

20

25

30

35Expected Shortfall of Asset Losses

Liquidity Contagion

Loss Contagion

Fundamental Loss

(%)(%)

2006 2007 2008 2009 20100

0.5

2006 2007 2008 2009 20100

5

10

15

20

25Expected Ratio of Distressed Banks

Liquidity Contagion

Loss Contagion

Fundamental Loss

2006 2007 2008 2009 20100

5

2006 2007 2008 2009 20100

1

2

3

4Probability of Systemic Crisis

Liquidity Contagion

Loss Contagion

Fundamental Loss

(%) (%)

IV. Policy Issues

Circumventions and Unintended Side Effects Circumventions and Unintended Side Effects

� Circumventions: “3 years + 1month” mortgages

offered when LTV or DTI applied to mortgages with

maturity of 3 years or less

� Asymmetric effects: LTV or DTI is counter-cyclical � Asymmetric effects: LTV or DTI is counter-cyclical

during housing boom but pro-cyclical during

downturn

� Balloon effects: Non-banks tend to increase

mortgage loans when LTV or DTI applied only to

banks

Coordination and Data Gaps Coordination and Data Gaps

� Two macroprudential authorities (BOK and

FSC/FSS) with no clear formal mechanism for

policy coordination

� Communication with fiscal authority� Communication with fiscal authority

� BOK: improved but yet no full access to needed

data (e.g., limited access to non-banks)

� Data gap is substantial (e.g., limited availability of

sufficiently granular data for SAMP)

Thank you!