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Financial Institution Risk Assessment Frameworks in Korea, Republic of: A Comprehensive Analysis

September 18, 2020 - The Financial Sector Assessment Program (FSAP) conducted by the International Monetary Fund has released a comprehensive risk analysis for the financial institutions in the Republic of Korea. This report presents a forward-looking solvency analysis for banks, insurers, and pension funds, as well as a liquidity stress test for banks and an assessment of network and interconnectedness for a wide range of financial sector entities.

Background

The risk analysis was informed by various structural characteristics of Korea’s economy and its financial system, including the country’s strong export orientation, limited diversification, and key role in regional and international supply chains. The financial system has grown significantly since 2013, with mortgage insurance schemes widely used, a large and highly concentrated life and non-life insurance sector, and rapid fintech developments.

Key Findings

  • A forward-looking solvency analysis was conducted for banks, insurers, and pension funds to assess their ability to withstand potential shocks.
  • A liquidity stress test was performed for banks to evaluate their capacity to meet short-term obligations during times of stress.
  • An assessment of network and interconnectedness was conducted for a wide range of financial sector entities and their ties to the real economy.

Policy Implications

  • Financial institutions should consider altering their business models in response to demographic developments and changing market conditions.
  • Regulatory authorities should continue to monitor the financial system and provide support as needed to maintain stability.
  • The government should prioritize policies that promote financial inclusion, stability, and resilience in the face of emerging risks.

Conclusion

This comprehensive analysis provides policymakers with valuable insights into the risk landscape of Korea’s financial institutions, enabling them to make informed decisions and implement effective measures to mitigate potential threats.