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  • 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

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