Korean Nonbank Financial Institutions Face the Risks of the Real Estate Market. International Monetary Fund (IMF) officials said that non-bank financial institutions exposed to the real estate market in South Korea face significant risks due to rising interest rates.
However, IMF Chief of Mission for Korea Harald Finger said there was scope for Korean banks to strengthen their resilience to financial stress by increasing their liquidity buffers and loss absorption capacity, in line with trends in some advanced economy counterparts.
Then, he also said that vulnerabilities emerged in several parts of the financial system, particularly in non-bank lenders who are highly exposed to real estate-related financing. It is known that concerns have begun to emerge in South Korea that bad credit in credit cooperatives is at risk of bringing trouble to the debt market.
Korean Nonbank Financial Institutions For example, one such company, MG Community Credit Cooperatives, had a branch closed last month, after reporting a loss of 60 billion won on real estate-related loans.
Financial regulators and the Bank of Korea have stepped up efforts to support troubled lenders. However, market moves which include increasing steady yields for some financial firms, suggest concerns over the prospects for this sector remain.
Finger in his note also said that the rapid policy response had stabilized financial markets and eased the outflow of deposits from troubled community cooperatives. However, he said credit risk remained high for lower quality securities and some non-bank financial institutions exposed to real estate.
Then, he also wrote that the property sector is systemically important in Korea. Total real estate-related financing is reported to be equivalent to around 125 percent of gross domestic product (GDP), as of September 2022.
With high leverage and the share of debt with significant ‘floating’ interest rates, this sector is vulnerable to rising interest rates. Then, moderate and progressive weakening is also welcome. However, excessive price reductions could raise financial stability concerns.