KDI Journal of Economic Policy

Korea Development Institute (한국개발연구원)
권호 표지
DOI QR코드

DOI QR Code

Assessing the Contributions of Non-bank Financial Institutions (NBFI) and ELS Issuance to Systemic Risk in Korea

  • Received : 2023.09.25
  • Published : 2024.02.29
Download PDF
⟨ Previous Next ⟩

Abstract

Since the Global Financial Crisis of 2008-2009, the importance of nonbank financial institutions in macroprudential management has increased significantly. Consequently, major countries and international financial institutions have been actively discussing and implementing macroprudential supervision and regulation for non-bank financial institutions (NBFI). In this context, this paper analyzes the systemic risk of both banks and non-bank sectors (securities firms and insurance companies) in South Korea over different time periods. Using the widely recognized ΔCoVaR methodology for measuring systemic risk, the analysis reveals that systemic risk increased substantially across all three sectors (banks, securities firms, and insurance companies) during the Global Financial Crisis, the European Sovereign Debt Crisis, and the COVID-19 pandemic. Although the banking sector exhibited relatively high systemic risk compared to the securities and insurance sectors, the relative differences in systemic risk varied across the different crisis periods. Notably, during the margin call crisis in March of 2020, the gap in systemic risk between the banking and securities sectors decreased significantly compared to that during both the Global Financial Crisis and the European Sovereign Debt Crisis, indicating that securities firms had a more substantial impact on risk in the overall financial system during this period. Furthermore, I analyze the impact of the issuance of equity-linked securities (ELS) by financial institutions on systemic risk, as measured by ΔCoVaR, finding that an increase in the outstanding balance of ELS issuance by financial institutions had an impact on increasing ΔCoVaR during the three crisis periods. These findings underscore the growing importance of non-bank financial institutions in relation to South Korea's macroprudential management and supervision. To address this evolving landscape, enhanced monitoring and regulatory measures focusing on non-bank systemic risk are essential components of maintaining financial stability in the country.

Keywords

Acknowledgement

This paper is an extension of Hong (2021, forthcoming). I thank two anonymous referees and Editor for their valuable suggestions. All remaining errors are mine.

References

  1. Acharya, Viral V., Lasse H. Pedersen, Thomas Philippon, and Matthew Richardson. 2017. "Measuring Systemic Risk," The Review of Financial Studies, 30(1): 2-47. https://doi.org/10.1093/rfs/hhw088
  2. Adrian, Tobias and Markus K. Brunnermeier. 2016. "CoVaR," American Economic Review, 106(7): 1705-1741. https://doi.org/10.1257/aer.20120555
  3. Bakshi, Gurdip and Nikunj Kapadia. 2003. "Delta-Hedged Gains and the Negative Market Volatility Risk Premium," The Review of Financial Economics, 16(2):527-566.
  4. Bank of Korea. 2022. "Financial Stability Report," December (in Korean).
  5. Brownlees, Christian, T. and Robert F. Engle. 2012. "Volatility, Correlation and Tails for Systemic Risk Measurement," SSRN Electronic Journal.
  6. FSB. 2020. "Holistic Review of the March Market Turmoil."
  7. Hong, Jong Soo. 2021(forthcoming). Study on Strengthening Macroprudential Policy Framework for Non-Bank Financial Intermediation (NBFI): Focused on Derivatives-Linked Securities, Policy Study, Korea Development Institute (in Korean).
  8. Jin, Okhee and Jin Lee. 2021. "Analysis of Effects of Credit Cycles on Systemic Risks in Financial Sectors," Journal of Financial Regulation and Supervision, 8(1): 97-121 (in Korean). https://doi.org/10.23229/FSS.2021.8.1.004
  9. Kim, Bum. 2019. "Review of Systemic Risk of Insurance Company," Korea Insurance Research Institute Research Report (in Korean).
  10. Kim, Jabonn and Kyoobok Lee. 2017. Analysis and Implications of Non-deposit Liabilities of Large Financial groups on System Risk, Korea Institutes of Finance Research Report, 2017-02 (in Korean).
  11. Kim, Jinho and Yoonjung Kim. 2010. "Risk Transfer Analysis between Financial Institutions," Ewha Journal of Social Sciences, vol.23: 75-102 (in Korean). https://doi.org/10.16935/EJSS.2010.23..004
  12. Lee, Hyosub. 2020. "System Risk from Financial Industry: Diagnosis and Countermeasures," Korea Insurance Research Institute Issue Paper, 20(13) (in Korean).
  13. Lee, Hyosub. 2017. Financial Risks from Increasing ELS and DLS: Diagnosis and Implications, Korea Capital Market Institute, 17-04 (in Korean).
  14. MoneyToday. 2021. "The Day, A Year ago, System Wobbled when Securities Companies Stumbled," Apr.13 (in Korean).
  15. Suh, Sangwon. 2018. "Measuring and Managing Systemic Risks: A Survey and Proposals," Financial Stability Studies, 19(1) (in Korean).
  16. Yoon, Sun-Joon and Jaehoon Jung. 2018. "The Effect of Equity Linked Securities on Financial Stability in Korea," Journal of Derivatives and Quantitative Studies, 26(1): 85-114 (in Korean). https://doi.org/10.1108/JDQS-01-2018-B0004