Authorities say immediate impact is limited, but warn risks could rise if conflict drags on
South Korean authorities have assessed the initial impact of the Middle East conflict as limited on the nation’s financial sector. However, they cautioned that a prolonged crisis could significantly affect both the South Korean economy and its financial markets.
The Financial Services Commission (FSC) convened a meeting on Thursday with key financial institutions and associations to evaluate the repercussions of escalating tensions in the Middle East. Increased oil prices, foreign-exchange volatility, and rising bond yields are contributing to the growing market pressure.
The assessment indicated that domestic financial institutions maintain a solid foundation, with stable foreign currency liquidity. This currently minimizes the risk of widespread systemic issues.
Korean banks’ average common equity tier 1 ratio, a vital capital buffer, is approximately 13 percent, exceeding the regulatory minimum of 8 percent. Insurers’ K-ICS ratio, a measurement of financial stability, was above 210 percent at the end of the third quarter of the previous year. Credit finance companies and savings banks also appear to have sufficient capital adequacy.
Direct financial exposure to the Middle East is considered limited. The six major South Korean banks hold approximately 4.3 trillion won ($2.87 billion) in exposure to the region, representing only 0.3 percent of total risk-weighted assets. Exposure to Iran and Israel specifically amounts to approximately 1 billion won.
Insurance companies also have moderate exposure. Life insurers hold 5.1 trillion won of Middle East exposure, or 0.6 percent of invested assets, while non-life insurers hold 2.4 trillion won, or 0.7 percent.
Despite the current stability, authorities emphasized that a prolonged conflict could have a substantial impact on the broader South Korean economy and financial industry, and committed to maintaining a state of readiness.
Regulators are proactively enhancing sector-specific risk management. Banks will closely monitor exposure to industries sensitive to oil price fluctuations and track profitability across different sectors. Insurance companies will prepare for various rate scenarios and strengthen duration gap management to mitigate capital volatility.
Credit finance firms will prioritize securing alternative funding sources, including bank loans, asset-backed securities, and commercial paper, in response to increasing bond market volatility.
Furthermore, a review of marine insurance policies related to risks in the Strait of Hormuz revealed that 32 out of 33 canceled war-risk riders have been successfully replaced. Insurers have also pledged to expedite Middle East-related claims processing and offer guidance regarding potential premium adjustments.
“Authorities will thoroughly examine not only key indicators such as capital ratios and delinquency rates, but also potential risk factors, including the impact of increased capital market inflows on deposit levels,” stated an FSC official.
jwc
