Top 5 Risks
Domestic financial market experts named uncertainty about China and emerging markets and America’s tapering as the two greatest factors threatening the Korean financial system this year. In particular, there was a six-time increase in respondents concerned about insecurity involving China and emerging markets year-on-year.
According to the result of a systemic risk survey announced on the 25th of March by the Bank of Korea, America’s tapering of quantitative easing topped the list of the five core financial risks.
The Central Bank earlier had conducted a survey from Feb. 10 to 19 of department heads in charge of management strategy and risk from 77 financial companies, 74 financial market participants (including fund managers), and 16 people in charge of Korean investment at overseas asset management companies.
According to the survey, the number one risk, “America’s tapering” (77 percent), was followed by “China’s economic slowdown” (72 percent), “household debt problem” (70 percent), “financial uncertainty in emerging markets” (57 percent), and “companies’ increased credit risk” (41 percent).
The shift in core risks suggests decreased domestic uncertainties and increased overseas uncertainties.
In regards to related overseas risks, “China and emerging market risk” soared to 129 percent in one year from 24 percent in the first half of 2013, and “America’s tapering risk” also jumped to 77 percent in the first half this year from 50 percent the same period last year.
Domestic-related risks seem to be shrinking. “Household debt problem” sank from 82 to 70 percent, “real estate market insecurity” from 57 to 22 percent, and “increased company credit risk” from 53 to 41 percent.
As to the probability of the five core risks being realized, respondents perceived “America’s tapering” and “emerging markets’ financial uncertainty” as short-term risks (less than one year), “China’s economic slowdown” and “household debt problem” as mid-term risks (1-3 years), and “company credit risk” as a mid-to-long-term risk (within 3 years).
Financial institutes recognized “America’s tapering” risk as a highly realizable risk with a heavy impact on the financial system, while viewing “China’s economic slowdown” and “household debt” as big risks with low probability. In the meantime, “emerging markets’ financial uncertainty” was evaluated to be a high-probability but moderate impact risk.
On the probability for financial system risk to be realized within a year, 51 percent said “low,” hovering much higher than “high” (16 percent). Particularly, many overseas respondents said “low,” accounting for 94 percent of the total, reflecting expectations that our financial system will stay stable despite domestic and overseas uncertainties.
The probability for short term financial risks to occur seems to be decreasing. As to the possibility for financial risks to be realized in the short term, the response “high” fell from 33 percent in the first half of 2012 to 16 percent in the first half of 2014, whereas people responding “low” rose from 32 percent to 51 percent.
However, as to the probability for financial system risk to be realized within 1 to 3 years, 30 percent said “low” and 23 percent said “high.” By the survey respondents’ category, overseas subjects tended to believe in the low probability of realizing financial system risk, whereas non-banking respondents evaluated the risk as high.