Korea needs to heed risks from shadow banking: BOK report

Korea needs to closely monitor potential risks posed by shadow banking due to its sustained growth and fallout on the financial system, a central bank report showed Thursday.

Shadow banking broadly refers to financial activities that are done by non-banking institutions via a wide range of channels, but are not under the stringent scrutiny usually applied to banks.

How to regulate shadow banking is being globally discussed, as it can pose potential systemic risks when a financial crisis occurs because such quasi-banking business is easily exposed to credit and liquidity risks due to lax regulatory supervision.

A Bank of Korea (BOK) report said that the size and weight of shadow banking in Korea are small compared with those of major economies, but the financial watchdog and the central bank should closely monitor shadow banking.

The value of shadow banking in Korea reached 1,268 trillion won (US$1.2 trillion) as of end-2011 and it grew at an average yearly rate of 11.8 percent between 2007 and 2010.

The ratio of shadow banking against gross domestic product stood at 102.3 percent for Korea, lower than 160.1 percent for the U.S. and 175.4 percent for the eurozone.

The report said that in the aftermath of the global financial crisis, the growth of shadow banking has slowed in major economies, but South Korea has seen the sustained growth of such activities, driven by brokerage houses and second-tier capital financing firms.

As Korea has maintained relatively tighter regulations on financial instruments deemed as shadow banking like asset-backed securities and repurchase agreement deals, risks from shadow baning are not seen as high in Korea for now, it added.

"But as shadow banking has contagious risks into other financial sectors when a crisis occurs, monitoring should be strengthened," the report said.

Potential risks from shadow banking could increase as Korea is making efforts to tear down barriers in the financial sector by adopting a law on the capital market, it noted. A long streak of low rates is also feared to raise incentives for financial institutions to push for risk-taking activities.(Yonhap)