Value context and insight. lkm@koreatimes.co.kr
Financial firms urged to tighten monitoring on risky assets
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By Lee Kyung-min
By Lee Kyung-min
The Korea Institute of Finance (KIF) has called on financial firms to strengthen their monitoring of risky assets as rising corporate debt is emerging as the possible trigger of a new “black swan” event in the global financial market.
A black swan event refers to an unpredictable occurrence that is beyond what is normally expected of a situation and has potentially major consequences.
In response to an inquiry from Rep. Kim Song-sik of the minor opposition Bareunmirae Party, the economic think tank said proper and continued monitoring should be in place against local financial firms making risky investments involving leveraged loans extended to poor-credit companies or individuals that already have considerable amounts of debt.
Also to be monitored are investments in collateralized loan obligations (CLO), with which investors make money if low-credit borrowers default on high-interest loans, emerging market treasuries and the real-estate market.
“Investments in such risky assets may not see an immediate default risk amid the current low-interest rate,” the KIF said. “However, if the key base rate rises, those underlying assets will fast become vulnerable to default risks, severely undermining financial stability,” it added.
The recommendation follows a recent rise in corporate debt in both advanced and emerging economies, a risk factor that it views could develop into a full-blown crisis.
China, for example, saw its corporate debt jump to about $19.8 trillion in 2018, an over four-fold increase from $4.5 trillion in the global financial crisis in the late 2000s.
Its debt-to-GDP ratio subsequently grew to 151.6 percent 93.1 percent.
This raises alarm about greater default risks as China saw around 1.2 trillion yuan ($169.85 billion) in corporate bond default in 2018, a four-fold increase from the year before.
Already, the defaulted amount reached 710 billion yuan in the first seven months of 2019.
Likewise, leveraged loans to financially vulnerable companies ranked below investment grade have spiked over the past few years in advanced economies including the U.S. and Europe. The amount was $2.2 trillion here in 2018 according to the KIF.
Meanwhile, the concern coincides with a series of failed investments of high-risk, high-yield derivatives, notably derivative-linked securities (DLS) sold by Woori Bank and KEB Hana Bank. Many buyers lost their investment in their entirety.
Led in large part by the DLS fiasco, Lime Asset Management, Korea's largest hedge fund, came under scrutiny after it failed to promptly liquidate assets to give money back to investors who grew increasingly unsettled over similar possible losses.