Korean Shadow Banking
The size of shadow banking has reached 1.561 quadrillion won (US$1.481 trillion) in Korea. Its ratio to the national GDP is the seventh-highest among the 26 countries where the Financial Stability Board (FSB) conducted a relevant survey recently.
Justice Party lawmaker Park Won-seok, who is associated with the Strategy and Finance Committee of the National Assembly, said on April 3 that the size of shadow banking is showing a rapid increase in Korea these days, with local securities companies issuing more and more asset-backed commercial papers (ABCPs) by means of money trusts and the like.
Shadow banking can be defined as a group of entities that fulfills fund brokerage functions via complex financial transactions as banks do. However, the difference is that they are not subject to the strict supervision or regulation of banks in general.
According to the lawmaker’s data submitted by the Bank of Korea, the size of shadow banking in a broad sense amounted to 1.561 quadrillion won (US$1.481 trillion) as of the end of last year, adding approximately 157 trillion won (US$149 billion) in just one year. The broad sense of the term includes those institutions and products providing credit intermediation out of the banking system. In particular, the trust account increased by about 7 trillion won (US$6.6 billion) to lead the surge. The trust account covers the special money trust accounts of banks, insurers, and stock firms.
The shadow banking institutions and products in the narrow sense, in the meantime, jumped by 3 trillion won (US$2.8 billion) and 5.7 trillion won (US$5.4 billion) to 646 trillion won (US$613 billion) and 564 trillion won (US$535 billion) during the same period, respectively. Products of securities organizations, specialized credit financial businesses, special-purpose companies, and loan providers are included in this category. The ABCPs reached 14 trillion won (US$13 billion) in size, followed by the mortgage-backed securities (MBS) issued by the Korea Housing Finance Corporation (12 trillion won, US$11.4 billion) and other liquidation assets (6 trillion won, US$5.9 billion).
Nowadays, local stock firms are increasing their ABCP sales. According to the Korea Financial Investment Association, their special money trust amounted to 121.2107 trillion won (US$115.0289 billion) at the end of January this year, increasing by over 7 trillion won (US$6.6 billion) in five years.
This reflects that more and more corporations are procuring financial resources with direct rather than indirect financing means. The problem is that some conglomerates use their financial subsidiaries to support their non-banking affiliates or are engaged in incomplete sales, as in the case of the recent Tong Yang scandal, during the course.
The FSB recently announced that Korea’s shadow banking-to-GDP ratio exceeded 100 percent this year. “The percentage is likely to keep going up, as the participation in the payment and settlement systems and business loans are allowed for securities companies,” the lawmaker explained, continuing, “At the same time, shadow banking risks could emerge in the form of payment and settlement risks and other systemic risks, which means the supervisory authorities including the central bank have to set up monitoring systems as soon as possible.” Bank of Korea Governor Lee Ju-yeol, in this context, has mentioned strengthened monitoring of shadow banking as one of his five tasks for financial stability during his confirmation hearing as of late.