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International Monetary Fund. Monetary and Capital Markets Department
This note presents the systemic risk analysis conducted for the Republic of Korea in the course of the 2019 Korea FSAP. It comprises a forward-looking solvency analysis for banks, insurers, and pension funds, a liquidity stress test for banks, and an assessment of network and interconnectedness for a wide range of financial sector entities and their ties to the real economy. Various structural characteristics of Korea’s economy and its financial system informed the features and focus for its forward-looking risk analysis. They include Korea’s strong export orientation, limited diversification, and its key role as a node in regional and international supply chains. Korea’s financial system has grown by 40 percentage points of GDP since 2013, enhancing the importance of a deep financial sector analysis as conducted through the FSAP. Mortgage insurance schemes are widely used—which was reflected in the way the risk assessment for banks was conducted. Korea’s life and non-life insurance sector is large, highly concentrated and saturated. Fintech developments keep accelerating, in terms of its Open Banking system and e-money providers. Demographic developments in Korea are among the most adverse world-wide, implying a continuous drag on demand, downward pressure on interest rates, financial firms’ income, and hence their capitalization unless they will be altering their business models.
International Monetary Fund. Monetary and Capital Markets Department

Executive Summary 1 This note presents the systemic risk analysis conducted for the Republic of Korea in the course of the 2019 Korea FSAP . It comprises a forward-looking solvency analysis for banks, insurers, and pension funds, a liquidity stress test for banks, and an assessment of network and interconnectedness for a wide range of financial sector entities and their ties to the real economy. Various structural characteristics of Korea’s economy and its financial system informed the features and focus for its forward-looking risk analysis . They

International Monetary Fund. Monetary and Capital Markets Department

Systemic Risk Analysis RISKS, VULNERABILITIES, AND MACRO-FINANCIAL SCENARIOS A Risks, Vulnerabilities, and Macro-Financial Scenarios B. Fintech Developments in Korea FORWARD-LOOKING BANK SOLVENCY ANALYSIS A. Methodology B. Results C. Recommendations FORWARD-LOOKING BANK LIQUIDITY ANALYSIS A. Overview B. Current Liquidity Conditions and Banks’ Liquidity Profiles C. Methodology D. Results E. Recommendations RISK ANALYSIS FOR THE INSURANCE AND PENSION FUND SECTOR A. Insurance Sector B. Pension Fund Sector C. Recommendations NETWORK AND

International Monetary Fund. Monetary and Capital Markets Department
The financial stability assessment under the Financial Sector Assessment Program (FSAP) for Korea was carried out in close collaboration with the authorities. The assessment included top- down (TD) and bottom-up (BU) stress testing of Korea’s commercial banks and certain non-bank depository institutions (NBDIs); and evaluation of the potential contagion across banks (stemming both from funding pressures and potential defaults). The FSAP team did not have access to confidential supervisory data for the stress tests and the contagion analyses.2 The practice of withholding information in the context of an FSAP, while undesirable, is also observed in other FSAPs. As a result, the analyses were carried out by the authorities in cooperation with participating banks, with the FSAP team performing extensive methodological and estimation validations of the results. The stress testing exercise included TD and BU stress tests of banks’ solvency and liquidity. For the solvency analysis, the TD tests were based on the internal Systemic Risk Assessment Model for Macroprudential Policy (SAMP) developed by the Bank of Korea (BOK), complemented by macroeconomic projections from the BOK’s macroeconomic model. These were supplemented by BU tests, carried out by individual banks. For the liquidity analysis, the TD tests were carried out by the Financial Supervisory Service (FSS), with separate assessments of banks’ local currency and foreign exchange (FX) liquidity risks. BU tests of liquidity were performed by individual banks, and were based on a different set of assumptions on potential liquidity outflows. All stress tests were based on assumptions and parameters agreed between the authorities and the FSAP team.
International Monetary Fund. Monetary and Capital Markets Department

The financial stability assessment under the Financial Sector Assessment Program (FSAP) for Korea was carried out in close collaboration with the authorities. The assessment included top- down (TD) and bottom-up (BU) stress testing of Korea’s commercial banks and certain non-bank depository institutions (NBDIs); and evaluation of the potential contagion across banks (stemming both from funding pressures and potential defaults). The FSAP team did not have access to confidential supervisory data for the stress tests and the contagion analyses.2 The practice of withholding information in the context of an FSAP, while undesirable, is also observed in other FSAPs. As a result, the analyses were carried out by the authorities in cooperation with participating banks, with the FSAP team performing extensive methodological and estimation validations of the results. The stress testing exercise included TD and BU stress tests of banks’ solvency and liquidity. For the solvency analysis, the TD tests were based on the internal Systemic Risk Assessment Model for Macroprudential Policy (SAMP) developed by the Bank of Korea (BOK), complemented by macroeconomic projections from the BOK’s macroeconomic model. These were supplemented by BU tests, carried out by individual banks. For the liquidity analysis, the TD tests were carried out by the Financial Supervisory Service (FSS), with separate assessments of banks’ local currency and foreign exchange (FX) liquidity risks. BU tests of liquidity were performed by individual banks, and were based on a different set of assumptions on potential liquidity outflows. All stress tests were based on assumptions and parameters agreed between the authorities and the FSAP team.

Miss Liliana B Schumacher and Mr. Mario I. Bléjer

putting it at risk, and refines the concepts relevant for solvency analysis of central bank portfolios. It postulates that a loss of solvency increases central bank financial vulnerability and leads to credibility losses regarding central bank’s ability to defend a nominal regime, including exchange rate pegs. The methodology proposed for appraising central banks’ financial vulnerability is based on Value-at-Risk (VaR), a concept developed to assess commercial risk. While central banks cannot commercially fail, they behave equivalently if they forsake their

International Monetary Fund. Monetary and Capital Markets Department