Financial Financial Systemic Risk Management Systemic Risk - PowerPoint PPT Presentation

G20 Conference on Financial Systemic Risk (September 27-28, 2012, Istanbul, Turkey) Financial Financial Systemic Risk Management Systemic Risk Management Korea’s Experiences Korea’s Experiences Korea’s Experiences Korea’s Experiences Jun Il Kim Jun Il Kim Bank of Korea Bank 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 Capital Inflows to Korea Housing Prices in Seoul & GDP Growth & GDP Growth & GDP Growth (%) (%) (%) 14 40 15 (%) (%) 30 4 10 GDP Growth (LHS) 35 Capital inflows/GDP(LHS) 12 5 Housing Prices(Seoul, 2 30 RHS) GDP growth (RHS) 10 20 10 25 0 0 8 20 -5 5 10 15 6 GDP Growth (RHS) -2 10 -10 4 Net Capital 0 0 Flow/GDP (LHS) 5 -4 -15 2 0 0 -5 -6 -20 -5 -10 01 03 05 07 09 11 00 02 04 06 08 10 00 02 04 06 08 10 Source: BOK staff Calculation Source: BOK, Kookmin Bank

Procyclical and Volatile Capital Flows (2/2) Financial Market Volatilities Capital Flows (std. dev*) (Billion dollars) Won/Dollar FX rate (LHS) 250 140 0.35 A 221.9 Short-term debt C KOSPI (LHS) Bond Treasury Bond Yield (3Y, RHS) 200 120 0.30 Equity Equity B 150 100 0.25 101.6 80 0.20 100 60 0.15 50 40 0.10 0 -12.6 -21.4 20 0.05 -50 -69.6 0 0.00 -100 C A B 97 99 01 03 05 07 09 11 97.11~98.3 98.4~08.8 08.9~08.12 09.1~11.6 11.7~11.12 (EA Fiscal Crisis) (Asian Crisis) (Lehman Crisis) * 3-month moving averages Source: BOK staff calculation

External Vulnerabilities Prior to GFC Over-hedging and ST Debt Net FX liabilities of Banks (Billion dollars) 140 Short Short-term external term external ( Billion dollars ) 140 debts debts of of foreign foreign exchange banks exchange banks Foreign branches 120 120 Domestic banks 100 100 Net forward selling Net forward selling 80 80 of companies of companies 60 60 40 40 20 20 0 0 03 04 05 06 07 08 09 10 11 95 97 99 01 03 05 07 09 11

Build-up of Household Debt (1/4) � Household leverage at historical peak � Variable interest rate mortgages (93%) � Interest only paid, No Principal (78%) Household debt-to- Mortgage Loans, Mortgage Loans, by Mortgage Loans, by by Interest Rate Type 1) disposable income Repayment Type Installment Installment Mixed Rate 155% Repayment Loans on Repayment Loans on 2.4% which principal which principal currently being repaid, currently being repaid, Installment Installment Floating Floating 21.6% 21.6% Fixed Rate Fixed Rate Fixed Rate Fixed Rate Repayment Repayment Rate Rate 4.9% 4.9% 4.9% 4.9% Loans currently Loans currently 92.7% 92.7% in grace period, in grace period, Bullet Repayment Bullet Repayment 41.1% 41.1% Loans, 37.3% Loans , 37.3% 129% Source: Seoul metropolitan area home 2005 2006 2007 2008 2009 2010 Source : Bank of Korea mortgage loan data of 4 major Source : Bank of Korea Note: 1) As of end-June 2011 banks

Build-up of Household Debt (2/4) � 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 300 300 190 190 (%) (%) 300 300 (2000Q1=100) (2000Q1=100) Korea Korea US US UK UK Japan Japan Korea US 250 250 France 160 UK Ireland 200 200 130 150 150 100 100 100 50 50 70 2000 2002 2004 2006 2008 2010 2004 2005 2006 2007 2008 2009 2010 Source : Bank of Korea Source : Bank of Korea

Build-up of Household Debt (3/4) � Housing boom of 2005-08 driven by credit cycle (with cumulated price increase of more than 30%) Housing Price Index Housing Prices & Household (Seoul metropolitan area) Debt Growth Rates 1) 12 12 120 (2011.6=100) (%) (%) 110 10 8 100 90 8 4 80 6 0 70 Household Loans (LHS) Housing Price (RHS) 60 4 -4 2004 2005 2006 2007 2008 2009 2010 2011 2012 2003 2004 2005 2006 2007 2008 2009 2010 2011 Note: 1) Year-on-year

Build-up of Household Debt (4/4) � Steady decline in interest rates in the 2000s amid rising prime-age population Bank and Non-bank Deposit Rates Demographic change 20 (%) Bank Time Deposit (5yrs) 30% 18 18 Mutual Credit Companies Time Deposit (1yr) Mutual Credit Companies Time Deposit (1yr) Mutual Savings Bank Time Deposit (1yr) 16 25% Credit Unio Time Deposit (1yr) 14 Bank Time Deposit (6months-1yr less) 20% 12 10 15% 8 10% 6 Population Aged 40~54 4 5% 2 0% 0 1990 1995 2000 2005 2010 2015 2020 2025 2030 1998 2000 2002 2004 2006 2008 2010 2012

II. Macroprudential Policy Responses Responses

Addressing Capital Flow Volatility (1/2) FX derivatives positions of banks Currency Mismatches of Banks (Billion dollars) 250 50 (%) (billion won) 90 Scale of FX Derivatives Position of Domestic Banks(RHS) domestic banks 45 45 80 80 Scale of FX Derivatives Position of Foreign Branches(RHS) foreign bank branches 200 40 FX Derivatives ratios of Domestic Banks(LHS) 70 FX Derivatives ratios of Foreign Branches(LHS) 35 60 150 30 50 25 40 100 20 30 Implementation 15 (Oct. 10) 20 50 10 Announcement Ceiling cut (Jun. 10) 10 5 (Jul.11) 0 0 0 10.6 9 11 11.1 3 5 7 9 11 09.1Q 10.1Q 11.1Q

Addressing Household Leverage (1/2) LTV and DTI Regulations: 2003-11 LTV Ratios: A Comparison 140 (%) LTV DTI 116 120 Jun-2003 50~60% Oct-2003 40~60% 100 80 Mar-2004 50~70% 75 75 74 80 64 Aug-2005 40% 61 60 47 Sep-2006 40~70% 40 Jul-2009 50~70% Apr-2010 50% 20 Sep-2010 Temporary de-regulation 0 Apr-2011 Re-regulated

Addressing Household Leverage (2/2) Housing Indicators (Seoul area) Before and After Regulatory Tightening 1) Mortgage loans 2) House prices 3) Housing transactions 4) 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 Framework Framework

Financial Stability Policy Framework Ex-ante Prevention Ex ante Prevention Ex Ex-post Resolution post Resolution Macroprudential Policy Crisis Management � � Financial Services Commission (FSC) Financial Services Commission (FSC) � � BOK: BOK: Lender of Last Resort Lender of Last Resort � Financial Supervisory Service (FSS) � � � Financial Supervisory Service (FSS) Financial Supervisory Service (FSS) Financial Supervisory Service (FSS) � Korea Deposit Insurance � Korea Deposit Insurance � � Bank of Korea Bank of Korea Corp. (KDIC): Deposit Corp. (KDIC): Deposit Insurance and Resolution of FIs Insurance and Resolution of FIs � � Ministry of Strategy & Microprudential Policy Ministry of Strategy & � � Financial Services Commission Finance (MOSF): Finance (MOSF): FX Policies Financial Services Commission FX Policies and Bail and Bail- -out out (FSC) (FSC) � Financial Supervisory Service (FSS) � Financial Supervisory Service (FSS)

Amendment of BOK Act (31 Aug, 2011) Financial Stability Mandate Re Financial Stability Mandate Re-introduced introduced Assessment of Systemic Risk & starting point of Financial Stability Policy Framework Enhanced Access to Enhanced Access to Microprudential Microprudential Data Data Amended Act mandates BOK Access to MOU with FSS allowing BOK to Access B/S info of both Banks and Non-Bank FIs Wider Range of Microprudential Data Greater Accountability for Financial Stability Greater Accountability for Financial Stability Semiannual Report on Financial Stability (FSR) to National Assembly Greater Role in Addressing Systemic Risk Greater Role in Addressing Systemic Risk

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 ③ ③ Contagion loss ③ ③ ⑥ Systemic risk ⑥ ⑥ ⑥ ① ① Macro module ① ① module module ⑤ ⑤ ⑤ ⑤ Multi period module Expected Expected Expected Expected Value at Value at Value at Value at Risk Risk Default loss loss contagion loss Macro risk Fundamental Systemic Risk factors loss Indicators Liquidity contagion loss Systemic Systemic Expected Expected Crisis Crisis Shortfall Shortfall Probability Probability ② Bank loss ② ④ Liquidity risk ④ ② ② ④ ④ module module 12 THE BANK OF KOREA