The size of shadow banking has swelled to close to 2,000 trillion won (US$1.78 trillion) in Korea, according to a report released by the Bank of Korea on Nov. 6.
The central bank estimated the amount of nonbank financial intermediations at 1,957.1 trillion won (US$1.74 billion) as of the end of last year. The figure amounts to 113.1 percent of the nation’s nominal gross domestic product (GDP).
The figure was 1,020.2 trillion won (US$907.25 billion) in 2011, representing 76.7 percent of Korea’s nominal GDP. But it surpassed the size of Korea’s GDP in 2015 by reaching 1,626.3 trillion won (US$1.45 trillion won). Now, it is expected to pass the 2,000 trillion won (US$1.78 trillion) mark.
The size of shadow banking which could cause systemic risks totaled 882.9 trillion won (US$785.15 billion), nearly double the 477.7 trillion won (US$424.81 billion) tallied in 2011.
As nonbank financial intermediations are closely interlinked with the financial market, problems in the shadow banking sector can spread to the call loan market and the bond market. In the repurchase agreement (RP) market, nonbank financial institutions could face liquidity risks stemming from difficulties in refunding as their transactions are concentrated in overnight deals. A higher utilization of securities backed by bank debentures increases the possibility of risk proliferation as bank debenture and the RP market are interconnected.
Since securities firms, trust companies and collective investment vehicles are all closely interlinked within the financial system, problems in one sector can easily spread to other sectors, according to the BOK.
In particular, credit risk can spread as well if the base interest rate increases as a result of the normalization of monetary policy after a long period of monetary expansion. Credit and liquidity risks have remained at a low level in the low interest rate period. But they will have to be reassessed under a normalized monetary policy. A rise in credit and liquidity risks will have a greater impact on nonbank financial intermediations, which have a heavy dependence on the market.