South Korea's fiscal stimulus to carry lasting headwinds

It will reduce loan defaulting, but also loosens credit standards.

South Korea’s policy response against the disruptions caused by the pandemic will grant near-term liquidity relief but may heighten asset risk in the long run, a Moody’s report warned.

The country has announced financial support packages totalling more than $142b (KRW175t) and has relaxed multiple regulations to buttress the economy.

The injection of liquidity into households and businesses will reduce the risk of defaulting and thus anchor bank asset performance, said analyst Tae Jong Ok.

However, a prolonged adoption of these measures runs the risk of loosening credit standards and expanding exposure to nimble borrowers. Policy banks in particular are in danger due to the support they give to pandemic-hit sectors.

“The relaxation in bank regulations—including plans to bring forward lower risk-weighted asset floors with the implementation of the final revisions to rules on Basel III credit risk calculation—is credit negative, because it will enable banks to increase risk assets without strengthening their capital," Ok added.

Other liquidity rules will also be relaxed in the interim, but Moody’s expects banks to preserve enough funding and liquidity profiles as most regulations will return to normal after 12 months.

The policy measures will also be credit negative for the credit card segment as any easing in the cap on leverage ratios will allow an expansion of leverage when demand for consumer credit bounces back, the report said, but the immediate impact will be cushioned by strong risk aversion amongst households and credit card firms.

The central bank has widened the list of securities firms eligible as counterparties, and has expanded the list of eligible securities to include corporate bonds in its repo program. For insurers, the decision to allow sales of products through recorded phone conversations will partially balance the expected downturn in new insurance sales via face-to-face channels, the report concluded.

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