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G20 Conference on Financial Systemic Risk (September 27-28, 2012, Istanbul, Turkey) Financial Systemic Risk Management Korea’s Experiences Jun Il Kim Bank of Korea I. Systemic Risks of Korea 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) 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 14 (%) (%) 40 30 GDP growth (RHS) 10 4 (%) Housing Prices in Seoul & GDP Growth 10 15 (%) (%) 30 GDP Growth (LHS) 35 Capital inflows/GDP(LHS) 12 Capital Inflows to Korea & GDP Growth 5 2 10 25 8 20 6 15 0 2 5 10 0 0 GDP Growth (RHS) -2 10 5 20 0 -5 4 Housing Prices(Seoul, RHS) -10 Net Capital Flow/GDP (LHS) -4 -15 0 0 -5 -6 01 03 05 07 Source: BOK staff Calculation 09 11 00 02 04 06 08 10 -20 -5 -10 00 02 04 06 08 Source: BOK, Kookmin Bank 10 Procyclical and Volatile Capital Flows (2/2) Financial Market Volatilities (std. dev*) Capital Flows 250 (Billion dollars) 221.9 Short-term debt Bond 200 140 Won/Dollar FX rate (LHS) KOSPI (LHS) Treasury Bond Yield (3Y, RHS) A 120 Equity C 0.30 B 100 150 0.35 0.25 101.6 100 80 0.20 50 60 0.15 0 40 0.10 -12.6 20 0.05 C 11.7~11.12 0 -50 -21.4 -69.6 -100 A 97.11~98.3 B 98.4~08.8 08.9~08.12 09.1~11.6 (EA Fiscal Crisis) (Asian Crisis) (Lehman Crisis) Source: BOK staff calculation 0.00 97 99 01 03 * 3-month moving averages 05 07 09 11 External Vulnerabilities Prior to GFC Over-hedging and ST Debt (Billion dollars) Net FX liabilities of Banks Short-term external Shortdebts of foreign exchange banks 140 120 (Billion dollars) Foreign branches Domestic banks 120 100 100 80 140 Net forward selling of companies 80 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-todisposable income 155% Mortgage Loans, by Interest Rate Type1) Mixed Rate 2.4% Fixed Rate 4.9% Floating Rate 92.7% 129% 2005 2006 2007 2008 2009 2010 Source : Bank of Korea Source : Bank of Korea Note: 1) As of end-June 2011 Mortgage Loans, by Repayment Type Installment Repayment Loans on which principal currently being repaid, 21.6% Installment Repayment Loans currently in grace period, Bullet Repayment 41.1% Loans,, 37.3% Loans Source: Seoul metropolitan area home mortgage loan data of 4 major 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) Household Debt to Disposable Income House Price : Selected Countries 300 300 190 (2000Q1=100) Korea US France UK Ireland 250 200 (%) Korea US UK Japan 250 160 200 130 150 150 100 100 50 50 2000 2002 2004 Source : Bank of Korea 2006 2008 2010 100 70 2004 2005 2006 Source : Bank of Korea 2007 2008 2009 2010 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 (Seoul metropolitan area) 120 Housing Prices & Household Debt Growth Rates1) 12 (2011.6=100) (%) (%) 12 110 10 8 8 4 6 0 100 90 80 70 Household Loans (LHS) Housing Price (RHS) 60 2004 2005 2006 2007 2008 2009 2010 2011 2012 4 -4 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 20 (%) Demographic change Bank Time Deposit (5yrs) Mutual Credit Companies Time Deposit (1yr) Mutual Savings Bank Time Deposit (1yr) Credit Unio Time Deposit (1yr) Bank Time Deposit (6months-1yr less) 18 16 14 30% 25% 20% 12 10 15% 8 10% 6 Population Aged 40~54 4 5% 2 0% 0 1998 2000 2002 2004 2006 2008 2010 2012 1990 1995 2000 2005 2010 2015 2020 2025 2030 II. Macroprudential Policy Responses Addressing Capital Flow Volatility (1/2) FX derivatives positions of banks 250 (%) 200 150 100 Currency Mismatches of Banks (billion won) 50 90 (Billion dollars) Scale of FX Derivatives Position of Domestic Banks(RHS) domestic banks 45 80 Scale of FX Derivatives Position of Foreign Branches(RHS) foreign bank branches 40 FX Derivatives ratios of Domestic Banks(LHS) 70 FX Derivatives ratios of Foreign Branches(LHS) 35 60 30 50 25 40 20 15 30 Implementation (Oct. 10) 10 20 50 0 10.6 9 11 11.1 3 5 7 9 11 5 10 0 0 Announcement (Jun. 10) 09.1Q 10.1Q Ceiling cut (Jul.11) 11.1Q Addressing Household Leverage (1/2) LTV and DTI Regulations: 2003-11 LTV Ratios: A Comparison 140 (%) LTV Jun-2003 50~60% Oct-2003 40~60% Mar-2004 50~70% Aug-2005 DTI 100 80 40% 40~70% Jul-2009 50~70% 40 Apr-2010 50% Sep-2010 Temporary de-regulation Apr-2011 Re-regulated 80 75 61 60 Sep-2006 116 120 20 0 75 74 64 47 Addressing Household Leverage (2/2) Housing Indicators (Seoul area) Before and After Regulatory Tightening1) Mortgage loans2) House prices3) Housing transactions4) 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 Financial Stability Policy Framework ExEx-ante Prevention Macroprudential Policy Financial Services Commission (FSC) Financial Supervisory Service (FSS) Bank of Korea ExEx-post Resolution Crisis Management BOK: Lender of Last Resort Korea Deposit Insurance Corp. (KDIC): Deposit Insurance and Resolution of FIs Microprudential Policy Financial Services Commission (FSC) Financial Supervisory Service (FSS) Ministry of Strategy & Finance (MOSF): FX Policies and BailBail-out Amendment of BOK Act (31 Aug, 2011) Financial Stability Mandate ReRe-introduced Assessment of Systemic Risk & starting point of Financial Stability Policy Framework Enhanced Access to Microprudential Data 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 Greater Accountability for Financial Stability Semiannual Report on Financial Stability (FSR) to National Assembly 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 interconnectedness Macro stress test platform Evaluate policy effectiveness Test vulnerabilities of individual banks Structure of BOK SAMP: Six Modules ① Macro module ③ Contagion loss module ⑥ Systemic risk module ⑤ Multi period module Default contagion loss Macro risk factors Fundamental loss Liquidity contagion loss Expected loss Systemic Risk Indicators Expected Shortfall ② Bank loss module THE BANK OF KOREA ④ Liquidity risk module Value at Risk Systemic Crisis Probability 12 Systemic Risk Indicators from BOK SAMP (%) Expected Asset Loss Rate (%) 2.5 2 Expected Shortfall of Asset Losses 35 3 Liquidity Contagion Loss Contagion Fundamental Loss 30 25 Liquidity Contagion Loss Contagion Fundamental Loss 20 1.5 15 1 10 0.5 0 2006 (%) 5 2007 2008 2009 2010 Expected Ratio of Distressed Banks 25 20 Liquidity Contagion Loss Contagion Fundamental Loss 0 2006 (%) 2007 2008 2009 2010 Probability of Systemic Crisis 4 3 Liquidity Contagion Loss Contagion Fundamental Loss 15 2 10 1 5 0 2006 2007 2008 2009 2010 0 2006 2007 2008 2009 2010 IV. Policy Issues 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 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 Two macroprudential authorities (BOK and FSC/FSS) with no clear formal mechanism for policy coordination 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!