IMF warns of risks with Korea's banking system

Finance Minister Hong Nam-ki, second from right, speaks to International Monetary Fund (IMF) managing director Kristalina Georgieva, second from left, at the IMF headquarters in Washington, D. C., Thursday (local time). / Courtesy of Ministry of Economy

By Park Jae-hyuk

The International Monetary Fund (IMF) has warned that Korea's banking system has become more vulnerable because its lenders are increasingly exposed to bad assets that have a high risk of turning sour.

It also voiced concerns that the worldwide low interest rate trend is ballooning corporate debt around the globe, which could lead to another global financial crisis.

In its Global Financial Stability Report published Wednesday (local time), the international organization mentioned Korea as one of the emerging countries having banking systems exposed to vulnerabilities.

"Chinese banks have the largest weighted exposure by this measure, given their sizable lending to domestic firms, households and other financial companies," the IMF said in the report. "The banking systems in Brazil, India, Korea and Turkey also have relatively high vulnerability weighted exposures."

Although vulnerabilities have continued to be relatively moderate in the banking sector, banks have been exposed to risks in other sectors through their lending, according to the IMF.

The organization noted that the lowering of interest rates worldwide has increased corporate debt, leading lenders to be exposed to risky assets.

According to the IMF, there has been policy easing in economies representing about 70 percent of world GDP, and the amount of bonds with negative yields has increased to about $15 trillion as a result.

The IMF said corporate debt-at-risk, which refers to debt owed by firms that are unable to cover their interest expenses with their earnings, could rise to $19 trillion, or nearly 40 percent of total corporate debt, in eight major economies ― the United States, China, Japan, Germany, the United Kingdom, France, Italy and Spain.

"Accommodative monetary policy is supporting the economy in the near-term, but easy financial conditions are encouraging financial risk-taking and are fueling a further buildup of vulnerabilities in some sectors and countries," the IMF said.

According to the Ministry of Economy and Finance, however, IMF Managing Director Kristalina Georgieva praised Korea for its expansionary fiscal and accommodative monetary policies during a meeting with Finance Minister Hong Nam-ki at the IMF headquarters in Washington, D.C., Thursday (local time).

On Wednesday, the Bank of Korea (BOK) cut its key interest rate by a 25 basis points to a record-low 1.25 percent, leaving the door open for further easing in the coming months on growing fears of a global recession.

A day before the BOK decision, the IMF lowered Korea's 2019 growth forecast to 2 percent from 2.6 percent and downgraded its outlook for next year to 2.2 percent from 2.8 percent.

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