Financial Financial Systemic Risk Management Systemic Risk - - PowerPoint PPT Presentation

Financial Financial Systemic Risk Management Systemic Risk Management Korea’s Experiences Korea’s Experiences

G20 Conference on Financial Systemic Risk (September 27-28, 2012, Istanbul, Turkey)

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 & GDP Growth Housing Prices in Seoul & GDP Growth Capital Inflows to Korea & GDP Growth

• 10

10 20 30

• 5

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

5 10 15 20 25 30 35 40 2 4 6 8 10 12 14 01 03 05 07 09 11 Capital inflows/GDP(LHS) GDP growth (RHS) (%) (%)

• 20
• 15
• 10
• 5

5 10

• 6
• 4
• 2

2 4 00 02 04 06 08 10 GDP Growth (RHS) Net Capital Flow/GDP (LHS) (%)

Capital Flows

A

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

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 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)

Short Short-term external term external debts debts of

• f foreign

foreign exchange banks exchange banks 120 140 Foreign branches Domestic banks

(Billion dollars)

External Vulnerabilities Prior to GFC

20 40 60 80 100 03 04 05 06 07 08 09 10 11 Net forward Net forward selling selling

• f companies
• f companies

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-

Interest only paid, No Principal (78%)

Mortgage Loans, 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 Loans Loans, 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

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% 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

Responses Responses

80 90 domestic banks

(Billion dollars)

Currency Mismatches of Banks FX derivatives positions of banks

45 50 250 Scale of FX Derivatives Position of Domestic Banks(RHS) (%) (billion won)

Addressing Capital Flow Volatility (1/2)

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) 5 10 15 20 25 30 35 40 45 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

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

Framework Framework

Ex Ex-ante Prevention ante 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

Ex Ex-post Resolution post Resolution

Financial Stability Policy Framework

Microprudential Policy

• Financial Supervisory Service (FSS)

Financial Supervisory Service (FSS)

• Bank of Korea

Bank 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 FIs Insurance and Resolution of FIs

• Ministry of Strategy &

Ministry of Strategy & Finance (MOSF): Finance (MOSF): FX Policies

FX Policies and Bail and Bail-

• out
• ut

Enhanced Access to Enhanced Access to Microprudential Microprudential Data Data Financial Stability Mandate Re Financial Stability Mandate Re-introduced introduced

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 Stability Greater 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

① ① ① ① Macro module ③ ③ ③ ③ Contagion loss module ⑥ ⑥ ⑥ ⑥ Systemic risk module ⑤ ⑤ ⑤ ⑤ Multi period module

THE BANK OF KOREA 12

Macro risk factors Fundamental loss

Default contagion loss Liquidity contagion loss Expected Expected loss loss Value at Value at Risk Risk Expected Expected Shortfall Shortfall Systemic Systemic Crisis Crisis Probability Probability

Systemic Risk Indicators

④ ④ ④ ④ Liquidity risk module ② ② ② ② Bank loss module

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

0.5 1 1.5 2 2.5 3

Expected Asset Loss Rate

Liquidity Contagion Loss Contagion Fundamental Loss 10 15 20 25 30 35

Expected Shortfall of Asset Losses

Liquidity Contagion Loss Contagion Fundamental Loss

(%) (%)

2006 2007 2008 2009 2010 0.5 2006 2007 2008 2009 2010 5 10 15 20 25

Expected Ratio of Distressed Banks

Liquidity Contagion Loss Contagion Fundamental Loss 2006 2007 2008 2009 2010 5 2006 2007 2008 2009 2010 1 2 3 4

Probability 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

• ffered 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!