Front Matter Page

IMF Country Report No. 20/278

REPUBLIC OF KOREA

FINANCIAL SECTOR ASSESSMENT PROGRAM

TECHNICAL NOTE—NON-FINANCIAL BALANCE SHEET VULNERABILITIES AND RISKS TO FINANCIAL STABILITY

September 2020

This Technical Note on Non-Financial Balance Sheet Vulnerabilities and Risks to Financial Stability for the Republic of Korea FSAP was prepared by a staff team of the International Monetary Fund as background documentation for the periodic consultation with the member country. It is based on the information available at the time it was completed in September 2020.

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© 2020 International Monetary Fund

Front Matter Page

REPUBLIC OF KOREA

FINANCIAL SECTOR ASSESSMENT PROGRAM

TECHNICAL NOTE

NON-FINANCIAL BALANCE SHEET VULNERABILITIES AND RISKS TO FINANCIAL STABILITY

September 1, 2020

The content of this Technical Note is based on information available as of end-June/December 2019, before the global intensification of the COVID-19 outbreak. It focuses on the Republic of Korea’s medium-term challenges and policy priorities and does not cover the outbreak or the related policy response, which has since become the overarching near-term priority.

Prepared By

Monetary and Capital Markets Department

Contents

• Glossary

• EXECUTIVE SUMMARY AND RECOMMENDATIONS

• NON-FINANCIAL CORPORATE BALANCE SHEETS

• A. Introduction

• B. Stylized Facts on Non-Corporate Balance Sheets

• C. Empirical Determinants of Debt-at-Risk Among Non-Financial Corporations

• D. Non-SME Firm Corporate Stress Analysis and Risk to Financial Stability

• E. Summary and Conclusion

• HOUSEHOLD BALANCE SHEETS

• A. Introduction

• B. Stylized Facts on Household Balance Sheets

• C. Household Debt-at-Risk

• D. Household Balance Sheet Stress Testing

• E. Summary and Conclusion

• BOXES

• 1. Shocks to Corporate Balance Sheets

• 2. Low for Long Interest Rates, Korean Corporate Leverage and Firm Performance

• 3. Corporate Debt Servicing Capacity

• 4. Corporate Profitability

• 5. Bottom Up Korean Non-Financial Corporate Stress Testing

• 6. Household Debt Sustainability and House Prices

• 7. Household Debt (Borrowers)-at-Risk

• 8. Determinants of Borrowers-at-Risk

• 9. Household Balance Sheet Stress Testing

• FIGURES

• 1. Non-Financial Corporate Leverage and Debt Structure

• 2. Non-SME Corporate Debt Risks

• 3. Non-Financial Corporate Performance and Activity Indicators

• 4. Non-Financial Corporate Liquidity Buffers

• 5. Non-Financial Corporate Debt-at-Risk

• 6. Marginal Effects of Firm Balance Sheet Indicators on Corporate Debt-at-Risk

• 7. Non-Financial Corporate Stress Scenario

• 8. Response of Non-Financial Corporate Default Barrier

• 9. Non-SME Corporate Default Risks

• 10. Household Debt Developments

• 11. Channeling of Household Loans

• 12. Household Balance Sheet Resilience

• 13. Household Balance Sheet Developments

• 14. Household Debt and Demographics

• 15. Demographics, Aging and Risks to Household Debt

• 16. Household Debt-at-Risk

• 17. Household Debt-at-Risk and Household Balance Sheet Leverage Ratios

• 18. Solvency and Liquidity Stress Testing of Household Balance Sheets

• TABLES

• 1. Corporate Debt-at-Risk Probit Regressions (ICR<1)

• 2. Corporate Profitability Regressions

• REFERENCES

• References

Glossary