Republic of Korea: Financial Sector Assessment Program-Technical Note-Systemic Risk Analysis, Financial Sector Stress Testing, and an Assessment of Demographic Shift in Korea
IMF Staff Country Reports, September 18, 2020
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- Republic of Korea: Financial Sector Assessment Program-Technical Note-Systemic Risk Analysis, Financial Sector Stress Testing, and an Assessment of Demographic Shift in Korea
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Bibliographic details
- Published: September 18, 2020
- Series: IMF Staff Country Reports
- DOI: https://doi.org/10.5089/9781513557052.002
Scope and analytical framework
- Presents the systemic risk analysis conducted for the Republic of Korea in the course of the 2019 Korea FSAP.
- Analytical components:
- Forward-looking solvency analysis for banks, insurers, and pension funds.
- Liquidity stress test for banks.
- Assessment of network and interconnectedness across a wide range of financial sector entities and their ties to the real economy.
- Structural features informing the analysis:
- Korea’s strong export orientation and limited diversification.
- Korea’s role as a node in regional and international supply chains.
- Rapid growth of the financial system: it has grown by 40 percentage points of GDP since 2013.
- Widespread use of mortgage insurance schemes—reflected in the bank risk assessment.
- Large, highly concentrated, and saturated life and non-life insurance sector.
- Accelerating fintech developments, including the Open Banking system and e-money providers.
- Adverse demographic developments among the most adverse world-wide, implying continuous drag on demand, downward pressure on interest rates, financial firms’ income, and capitalization unless business models are altered.
Key findings and risk channels
- Banking sector:
- Forward-looking solvency and liquidity vulnerabilities assessed through solvency analysis and liquidity stress testing.
- Mortgage insurance schemes materially affect bank risk exposures and loss absorption mechanics.
- Insurance and pension sectors:
- Life and non-life insurance sector characterized as large, highly concentrated, and saturated.
- Pension funds included in forward-looking solvency assessments to capture demographic and market risks.
- Systemic interconnectedness:
- Network analysis covers a wide range of financial entities and their linkages to the real economy, reflecting Korea’s integration in regional and global supply chains.
- Macroeconomic and structural drivers of financial risk:
- Export dependence and limited diversification heighten exposure to external shocks.
- Demographic deterioration constrains domestic demand, exerts downward pressure on interest rates, and weakens financial firms’ income and capitalization prospects.
- Fintech and market structure:
- Rapid fintech development (Open Banking, e-money) changes market dynamics and risk transmission channels.
Implications for policy and financial stability
- Need for deep, forward-looking analysis given financial system growth of 40 percentage points of GDP since 2013.
- Supervision and regulation should account for:
- The role of mortgage insurance schemes in bank risk profiles.
- Concentration and saturation in the insurance sector.
- Interconnectedness across banks, insurers, pension funds, and nonbank financial institutions.
- Strategic responses to demographic pressures:
- Financial firms may need to alter business models to sustain income and capitalization amid downward pressure on interest rates and demand.
- Monitoring fintech developments:
- Supervision and regulatory frameworks should adapt to Open Banking and e-money provider expansion to mitigate new operational and market risks.
Key statistics and publication metadata
- Financial system growth: 40 percentage points of GDP since 2013.
- Pages: 100
- Volume: 2020
- Issue: 279
- DOI: https://doi.org/10.5089/9781513557052.002
- Stock No: 1KOREA2020006
- ISBN: 9781513557052
- ISSN: 1934-7685
Republic of Korea: Financial Sector Assessment Program-Technical Note-Systemic Risk Analysis, Financial Sector Stress Testing, and an Assessment of Demographic Shift in Korea, IMF Staff Country Reports (September 18, 2020).
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- 1korea2020006