The financial authorities are closely monitoring various risks in the financial market, including the Middle East conflict, interest rate hikes by major countries, and uncertainties in artificial intelligence and semiconductors. They have stated that they will implement market stabilization measures promptly if necessary. Financial institutions have been instructed to prepare for potential increases in support measures if volatility in the bond market escalates due to rising market interest rates.
Lee Ok-yeon, chair of the Financial Services Commission, emphasized during a 'Financial Market Situation Review Meeting' on October 1 with financial experts from the Ministry of Finance, the Financial Supervisory Service, the Financial Research Institute, credit rating agencies, and securities firms, that the global monetary policy is shifting towards tightening. He noted that uncertainties from changes in the AI and semiconductor sectors and the situation in the Middle East are converging, indicating that the financial environment is entering a transitional phase.
He warned that during such transitions, unexpected risks may arise that defy past experiences. He urged relevant agencies to maintain heightened vigilance and proactively assess potential sector-specific risks, preparing necessary response measures in advance.
Participants in the meeting generally agreed that while volatility in the domestic stock and foreign exchange markets is increasing, there are signs of easing. The bond market has seen domestic government bond yields rise from 2.953% at the end of last year to 4.011% as of September 30, an increase of 105.8 basis points, driven by ongoing inflation concerns and interest rate hikes in major countries. However, the spread on corporate bonds has only slightly increased from 52.3 basis points to 69.2 basis points, suggesting that the risks are not as severe as during the funding crunch in 2022.
This stability is attributed to a market stabilization program that actively purchased 12.1 trillion won in corporate bonds and commercial paper following the outbreak of the Middle East conflict in March. The government had initiated a '100 trillion won + α' market stabilization program to buy commercial paper and provided 21.1 trillion won in support to small and export-oriented businesses.
While acknowledging the high level of domestic and external uncertainties, participants assessed that the domestic financial system has sufficient capacity to respond, considering the export and growth trends and the soundness of financial institutions. As of the end of August, the country's foreign exchange reserves stood at approximately $442.3 billion.
However, the rising market interest rates are accumulating financial burdens for economic entities. Particularly, if unexpected domestic or external credit events occur, the refinancing conditions could deteriorate rapidly, transferring risks to vulnerable sectors and potentially impacting the soundness of the financial sector.
In response, the financial industry is committed to continuously monitoring potential market risks, including liquidity risks due to mismatches in funding and operations, concentration of funds in specific sectors, timing of bond issuance and maturities, increased repayment burdens for vulnerable borrowers, and uncertainties in the outlook for AI and semiconductors.
Lee Ok-yeon reiterated that 'financial market stability is the top prerequisite for a productive and inclusive financial transformation.' He urged stakeholders to comprehensively assess risk factors in the market, including extreme risks with very low probabilities and their potential transmission pathways, and to implement necessary market stabilization measures promptly in the event of market instability.
He also emphasized the need to actively execute market stabilization programs to ensure stability in the bond and funding markets, and to prepare thoroughly in advance to quickly expand support measures if bond market volatility becomes excessive. Additionally, he called for a preemptive review of the issuance scale and maturity structure of bank bonds and other financial instruments in the fourth quarter to prevent supply burdens in the bond market, while closely monitoring the asset soundness, liquidity response capacity, and funding structures of financial institutions during this period of rising interest rates.
* This article has been translated by AI.
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