{"id":2200444,"date":"2023-03-20T14:36:16","date_gmt":"2023-03-20T05:36:16","guid":{"rendered":"https:\/\/koreapro.org\/?p=2200444"},"modified":"2023-04-05T16:07:54","modified_gmt":"2023-04-05T07:07:54","slug":"why-there-are-reasons-to-worry-about-south-korea-banks-after-svb-collapse","status":"publish","type":"post","link":"https:\/\/koreapro.org\/2023\/03\/why-there-are-reasons-to-worry-about-south-korea-banks-after-svb-collapse\/","title":{"rendered":"Why there are reasons to worry about South Korea banks after SVB collapse"},"content":{"rendered":"<p><span style=\"font-weight: 400;\">The failure of the <\/span><a href=\"https:\/\/www.wsj.com\/articles\/silicon-valley-bank-svb-financial-what-is-happening-299e9b65\"><span style=\"font-weight: 400;\">Silicon Valley Bank (SVB)<\/span><\/a><span style=\"font-weight: 400;\"> has rattled markets in the U.S. and raised fears that <\/span><a href=\"https:\/\/www.usatoday.com\/story\/money\/personalfinance\/real-estate\/2023\/03\/19\/svb-collapse-new-banks-could-fail\/11504269002\/\"><span style=\"font-weight: 400;\">other banks<\/span><\/a><span style=\"font-weight: 400;\"> could follow suit. While the effects in Asia have so far been minimal, the high-profile collapse nonetheless raises questions about the health of South Korea\u2019s own banking system.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">SVB was a medium-sized bank by U.S. standards, and its collapse had a limited <\/span><a href=\"https:\/\/m.khan.co.kr\/economy\/economy-general\/article\/202303121655001#c2b\"><span style=\"font-weight: 400;\">direct impact<\/span><\/a><span style=\"font-weight: 400;\"> on South Korean investors. SVB collapsed due to distinctive investment strategies and rising interest rates.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">But other banks, including those in South Korea, may also be <\/span><a href=\"https:\/\/en.yna.co.kr\/view\/AEN20230309002400320?section=news\"><span style=\"font-weight: 400;\">vulnerable<\/span><\/a><span style=\"font-weight: 400;\"> given persistent inflation and potential further interest rate increases.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">A Korea Pro Analysis indicates:<\/span><\/p>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Most large South Korean banks are well-capitalized by world standards, but many have booked substantial capital losses in the last year due to rising interest rates.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">An SVB-style bank run and failure seems unlikely, but more vulnerable financial institutions have already seen significant write-downs on their assets&#8217; value.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">The government seems to be concerned primarily with the profits the banks are making rather than their unrealized losses on assets they hold.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Meanwhile, some influential investors are concerned that the banks hold large amounts of cash on their balance sheets rather than paying out dividends to shareholders.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Regulatory uncertainty, low dividends and poor long-term prospects hold the industry back, which means that the banks are liable to remain in their low-valuation (Korea discount) trap.<\/span><\/li>\n<\/ul>\n<p><b>BANK HEALTH<\/b><\/p>\n<p><span style=\"font-weight: 400;\">Banking is a risky business. It involves taking people\u2019s cash (bank deposits) for interest (a cost for the bank) and lending them out to other people for interest (income for the bank). Banks also invest people\u2019s savings in stocks, bonds and other assets to generate a return. The spread between the rate banks pay savers and the rates of return it generates on assets, including loans to other people, is how a bank makes profits.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">The biggest issue here is what is called the <\/span><a href=\"https:\/\/www.investopedia.com\/terms\/m\/maturitymismatch.asp\"><span style=\"font-weight: 400;\">maturity mismatch<\/span><\/a><span style=\"font-weight: 400;\">. Depositors can withdraw their cash at any time, but a bank often cannot demand full repayment of a loan or sell the securities (shares, bonds and other financial instruments) on demand at cost. This mismatch can lead to bank failures if enough depositors demand their money back at once.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">To prevent bank failure, banks are required to hold a certain amount of capital in reserve. The key measure here is tier-1 capital, which refers to the portion of the bank\u2019s equity considered riskless or at least near riskless. This includes cash and common stock.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Since the <\/span><a href=\"https:\/\/www.investopedia.com\/terms\/a\/asian-financial-crisis.asp\"><span style=\"font-weight: 400;\">Asian financial crisis<\/span><\/a><span style=\"font-weight: 400;\"> of the late 1990s \u2014 South Korean banks have sought to maintain large and <\/span><a href=\"https:\/\/www.index.go.kr\/unity\/potal\/main\/EachDtlPageDetail.do?idx_cd=1087\"><span style=\"font-weight: 400;\">growing<\/span><\/a><span style=\"font-weight: 400;\"> capital buffers against potential losses. The large banks are <\/span><a href=\"https:\/\/www.fss.or.kr\/fss\/bbs\/B0000188\/view.do?nttId=57424&amp;menuNo=200218&amp;cl1Cd=&amp;sdate=&amp;edate=&amp;searchCnd=1&amp;searchWrd=BIS&amp;pageIndex=1\"><span style=\"font-weight: 400;\">especially<\/span><\/a><span style=\"font-weight: 400;\"> well-capitalized, with ratios similar to or higher than major <\/span><a href=\"https:\/\/www.bankregdata.com\/allHMmet.asp?met=ONE\"><span style=\"font-weight: 400;\">U.S. banks<\/span><\/a><span style=\"font-weight: 400;\">, though below the European <\/span><a href=\"https:\/\/www.statista.com\/statistics\/894782\/tier-one-capital-ratio-in-european-countries\/\"><span style=\"font-weight: 400;\">average<\/span><\/a><span style=\"font-weight: 400;\">.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">However, like banks elsewhere (in the U.S. and the <\/span><a href=\"https:\/\/sdw.ecb.europa.eu\/quickview.do;jsessionid=704826C863910A7F7BE7F14D1C4B583E?SERIES_KEY=420.SUP.Q.B01.W0._Z.I4002._T._Z._Z._Z._Z.PCT.C\"><span style=\"font-weight: 400;\">E.U.<\/span><\/a><span style=\"font-weight: 400;\">), Korean banks have taken substantial <\/span><a href=\"https:\/\/www.metroseoul.co.kr\/article\/20221206500291#:~:text=%EC%9D%B4%EC%96%B4%20%E2%96%B2%EC%8B%A0%ED%95%9C%EC%9D%80%ED%96%89(17.52,%EC%9A%B0%EB%A6%AC%EA%B8%88%EC%9C%B5%2014.30%25%20%EC%88%9C%EC%9D%B4%EC%97%88%EB%8B%A4.\"><span style=\"font-weight: 400;\">losses<\/span><\/a><span style=\"font-weight: 400;\"> on the value of their assets due to rising interest rates, which have pushed down the value of many financial assets. These are <\/span><a href=\"https:\/\/www.investopedia.com\/terms\/u\/unrealizedloss.asp\"><span style=\"font-weight: 400;\">book losses<\/span><\/a><span style=\"font-weight: 400;\"> \u2014 the assets remain on the books and have not been sold for a loss.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">The size of the losses is <\/span><a href=\"https:\/\/m.edaily.co.kr\/news\/Read?newsId=01157846635543648&amp;mediaCodeNo=257&amp;utm_source=https:\/\/www.google.com\/\"><span style=\"font-weight: 400;\">not<\/span><\/a><span style=\"font-weight: 400;\"> that large. Further, these losses have resulted from violent swings in interest rates and stock market declines, swings that appear unlikely to be repeated going forward. But crises are not just a product of the fundamentals; speculative manias and panics often drive markets up and down.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Moreover, there are clear signs of vulnerability in the Korean financial system. Like the U.S., with its increasingly fragile-looking <\/span><a href=\"https:\/\/www.investmentweek.co.uk\/news-analysis\/4080434\/us-regional-banks-challenging-future-aftermath-svb-blowup\"><span style=\"font-weight: 400;\">regional banks<\/span><\/a><span style=\"font-weight: 400;\">, some of Korea\u2019s savings banks have <\/span><a href=\"https:\/\/www.kdic.or.kr\/save\/state_view.do?location=AE52%20;%20https:\/\/www.businesspost.co.kr\/BP?command=article_view&amp;num=309050\"><span style=\"font-weight: 400;\">less healthy<\/span><\/a><span style=\"font-weight: 400;\"> capital buffers and more <\/span><a href=\"https:\/\/www.investmentweek.co.uk\/news-analysis\/4080434\/us-regional-banks-challenging-future-aftermath-svb-blowup\"><span style=\"font-weight: 400;\">worrisome<\/span><\/a><span style=\"font-weight: 400;\"> loan books.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">The most obvious way a crisis might emerge is through the <\/span><a href=\"https:\/\/koreapro.org\/2023\/01\/what-the-bank-of-korea-hopes-and-fears-for-the-south-korean-economy-in-2023\/\"><span style=\"font-weight: 400;\">housing market<\/span><\/a><span style=\"font-weight: 400;\">. The banks have lent a great deal to households to finance purchases, though most of this lending has gone to households with <\/span><a href=\"https:\/\/koreapro.org\/2022\/12\/what-rising-interest-rates-mean-for-the-south-korean-real-estate-market\/\"><span style=\"font-weight: 400;\">good<\/span><\/a><span style=\"font-weight: 400;\"> credit ratings.\u00a0<\/span><\/p>\n<p><a href=\"https:\/\/koreapro.org\/2022\/11\/legoland-default-a-bleak-signal-for-south-koreas-corporate-bond-market\/\"><span style=\"font-weight: 400;\">Project financing<\/span><\/a><span style=\"font-weight: 400;\"> (PF) for construction is the more immediate source of vulnerability. As the Bank of Korea\u2019s (BOK) most recent Monetary Credit Policy Report <\/span><a href=\"https:\/\/www.bok.or.kr\/portal\/bbs\/B0000156\/view.do?nttId=10075928&amp;menuNo=200754&amp;pageIndex=1\"><span style=\"font-weight: 400;\">made<\/span><\/a><span style=\"font-weight: 400;\"> clear, non-banking financial institutions, like insurers, savings banks, securities firms and credit card companies, have been heavily involved in such lending.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">PF is riskier than mortgage lending because, in case of a real estate market downturn, the owners of the new property being financed may have to sell it at a discount or even be unable to sell it. When the housing market goes bad, more PF tends to go bad more quickly than mortgage lending, or at least, that is the assumption undergirding the higher interest rates PF borrowers pay.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">A crisis with PF could hurt the financial system generally, with banks and other financial institutions needing cash injections or being forced to cut back on lending. Currently, overall delinquency rates across the financial industry are <\/span><a href=\"https:\/\/kdic.or.kr\/bank\/financial.do\"><span style=\"font-weight: 400;\">low<\/span><\/a><span style=\"font-weight: 400;\">, but there are risks that will worry the central bank and financial regulators going forward.<\/span><\/p>\n<div id=\"attachment_2200447\" style=\"width: 945px\" class=\"wp-caption alignnone\"><img decoding=\"async\" aria-describedby=\"caption-attachment-2200447\" class=\"size-post_feature_image wp-image-2200447\" src=\"https:\/\/koreapro.org\/wp-content\/uploads\/sites\/6\/2023\/03\/pexels-john-guccione-wwwadvergroupcom-3483098-1-935x500.jpg\" alt=\"\" width=\"935\" height=\"500\" \/><p id=\"caption-attachment-2200447\" class=\"wp-caption-text\"><em>U.S. one-hundred-dollar bills, Jan. 24, 2014 | Image: <a href=\"https:\/\/www.pexels.com\/photo\/100-us-dollar-banknotes-3483098\/\">Pexels<\/a><\/em><\/p><\/div>\n<p><b>MONEY PLEASE<\/b><\/p>\n<p><span style=\"font-weight: 400;\">Like the Federal Reserve (Fed) has discovered in the U.S. with the SVB crisis, the BOK is in a <\/span><a href=\"https:\/\/koreapro.org\/2023\/01\/what-the-bank-of-korea-hopes-and-fears-for-the-south-korean-economy-in-2023\/\"><span style=\"font-weight: 400;\">bind<\/span><\/a><span style=\"font-weight: 400;\">. With inflation still elevated and the Korean won depressed against the dollar, the BOK has good reason to keep raising rates. But with the real estate market in trouble \u2014 a market for the most significant asset held by households and the country\u2019s financial institutions \u2014 excessive rate raising could put financial stability and the livelihoods of many households at risk.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">The banking regulators have begun a crackdown on what South Korean President Yoon Suk-yeol has <\/span><a href=\"https:\/\/news.kbs.co.kr\/news\/view.do?ncd=7604869\"><span style=\"font-weight: 400;\">called<\/span><\/a><span style=\"font-weight: 400;\"> a \u201cmoney party.\u201d He has <\/span><a href=\"https:\/\/en.yna.co.kr\/view\/AEN20230222006200320\"><span style=\"font-weight: 400;\">decried<\/span><\/a><span style=\"font-weight: 400;\"> their excessive reliance on income from high interest rates and the growing <\/span><a href=\"http:\/\/www.rcast.co.kr\/sub02.php?BRD_ID=1677801976557\"><span style=\"font-weight: 400;\">spread<\/span><\/a><span style=\"font-weight: 400;\"> between loan and savings interest rates discussed above. This spread is not <\/span><a href=\"https:\/\/www.bok.or.kr\/portal\/bbs\/B0000347\/view.do?nttId=10072473&amp;menuNo=201106&amp;pageIndex=1\"><span style=\"font-weight: 400;\">historically high<\/span><\/a><span style=\"font-weight: 400;\"> but rising, and President Yoon\u2019s call for greater competition in a highly concentrated market appears <\/span><a href=\"https:\/\/www.bok.or.kr\/portal\/bbs\/P0002353\/view.do?nttId=10073295&amp;menuNo=200433\"><span style=\"font-weight: 400;\">reasonable<\/span><\/a><span style=\"font-weight: 400;\">.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Banks have pricing power; the market is concentrated. And when the prices rise \u2014 in this case, the price of money (interest rates) \u2014 firms with pricing power may take advantage by raising prices even more quickly. This seems to be part of what is happening with the banks.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Regulators have <\/span><a href=\"https:\/\/www.news1.kr\/articles\/?4981788\"><span style=\"font-weight: 400;\">proposed<\/span><\/a><span style=\"font-weight: 400;\"> making it easier to create specialized banks that lend to particular groups or allowing non-banking financial institutions, such as securities, to offer more banking services. The problem is that the risks in the system make size more important: Bigger capital buffers make big banks safer in times of stress.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">The government is also <\/span><a href=\"https:\/\/www.news1.kr\/articles\/4981677\"><span style=\"font-weight: 400;\">pushing<\/span><\/a><span style=\"font-weight: 400;\"> the banks to expand overseas in search of alternatives to the domestic market. The latter is growing more slowly and faces structural decline due to the <\/span><a href=\"https:\/\/koreapro.org\/2023\/02\/debate-about-free-subway-rides-for-senior-citizens-rises-amid-aging-society\/\"><span style=\"font-weight: 400;\">aging population<\/span><\/a><span style=\"font-weight: 400;\"> and a lack of credible future growth engines. Banking is risky by definition and potentially <\/span><a href=\"https:\/\/pubsonline.informs.org\/doi\/abs\/10.1287\/mnsc.2016.2422\"><span style=\"font-weight: 400;\">far more<\/span><\/a><span style=\"font-weight: 400;\"> so when expanding into new, unfamiliar markets. But diversification into new markets can also, paradoxically, lower risk and improve <\/span><a href=\"https:\/\/www.sciencedirect.com\/science\/article\/pii\/S0014292121000143\"><span style=\"font-weight: 400;\">profitability<\/span><\/a><span style=\"font-weight: 400;\">.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">As a long-term ambition, Korean banks becoming more involved in other parts of <\/span><a href=\"https:\/\/link.springer.com\/article\/10.1007\/s10614-021-10213-7\"><span style=\"font-weight: 400;\">Asia<\/span><\/a><span style=\"font-weight: 400;\"> with greater growth prospects appears sensible. But the timing might not be right in times of considerable volatility and downside risk \u2014 with recessions potentially on the horizon.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Meanwhile, investors are interested in immediate returns. Korean banking stocks already trade at a significant <\/span><a href=\"https:\/\/koreapro.org\/2022\/05\/the-korea-discount-why-south-koreas-stock-market-is-so-underpriced\/\"><span style=\"font-weight: 400;\">discount<\/span><\/a><span style=\"font-weight: 400;\"> compared to non-financial Korean firms and especially to banking stocks in other countries. One of the reasons offered for this is the low dividends the banks have paid their shareholders. In other words, buying and holding bank stocks is not worth it because one gets so poorly rewarded.\u00a0<\/span><\/p>\n<p><a href=\"http:\/\/weekly.chosun.com\/news\/articleView.html?idxno=23960\"><span style=\"font-weight: 400;\">Activist investors<\/span><\/a><span style=\"font-weight: 400;\"> are calling for the banks to <\/span><a href=\"https:\/\/dealsite.co.kr\/articles\/100426\"><span style=\"font-weight: 400;\">raise<\/span><\/a><span style=\"font-weight: 400;\"> their dividend payouts. Banks are not forced to hold their dividend rates artificially low by law. But shadow regulation (otherwise known as window guidance) has allegedly ensured that banks feel obliged to retain more capital than they otherwise would.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">The South Korean government has also previously <\/span><a href=\"https:\/\/www.fsc.go.kr\/po010101\/71859?srchCtgry=1&amp;curPage=86&amp;srchKey=&amp;srchText=&amp;srchBeginDt=&amp;srchEndDt=\"><span style=\"font-weight: 400;\">indicated<\/span><\/a><span style=\"font-weight: 400;\"> a desire to end administrative guidance of the banking sector. But given the current desire to control interest rate spreads, bank profitability may suffer, making it <\/span><a href=\"https:\/\/news.einfomax.co.kr\/news\/articleView.html?idxno=4254598\"><span style=\"font-weight: 400;\">less likely<\/span><\/a><span style=\"font-weight: 400;\"> dividends will rise much.<\/span><\/p>\n<p><i><span style=\"font-weight: 400;\">Edited by John Lee<\/span><\/i><\/p>\n<div class=\"content-tags\"><a href=\"https:\/\/koreapro.org\/tag\/business-economy\/\"><span class=\"tag\">Business &amp; Economy<\/span><\/a><\/div>","protected":false},"excerpt":{"rendered":"<p>The failure of the Silicon Valley Bank (SVB) has rattled markets in the U.S. and raised fears that other banks could follow suit. While the effects in Asia have so far been minimal, the high-profile collapse nonetheless raises questions about the health of South Korea\u2019s own banking system. SVB was a medium-sized bank by U.S. [&hellip;]<\/p>\n","protected":false},"author":10407,"featured_media":2200446,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[21],"tags":[24],"class_list":["post-2200444","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-analysis","tag-business-economy"],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v23.7 - https:\/\/yoast.com\/wordpress\/plugins\/seo\/ -->\n<title>Why there are reasons to worry about South Korea banks after SVB collapse - Korea Pro<\/title>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/koreapro.org\/2023\/03\/why-there-are-reasons-to-worry-about-south-korea-banks-after-svb-collapse\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Why there are reasons to worry about South Korea banks after SVB collapse - Korea Pro\" \/>\n<meta property=\"og:description\" content=\"The failure of the Silicon Valley Bank (SVB) has rattled markets in the U.S. and raised fears that other banks could follow suit. While the effects in Asia have so far been minimal, the high-profile collapse nonetheless raises questions about the health of South Korea\u2019s own banking system. 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