Risk Management in Korean Financial Institutions: Ten Years after the Financial Crisis

Abstract

Risk characteristics of the Korean financial market have changed dramatically during the decade following the financial crisis in 1997. First of all, credit risk in the large corporate sector has decreased significantly after turmoil in the corporate bond market in 1999 and 2000. Second, credit risk in the small and medium sized enterprises (SMEs) sector has been continuously deteriorating. Third, credit risk in the household sector has increased. Over-supply of credit by large financial institutions in early 2000s had created near crisis in this sector in 2003. The market stabilized rather quickly, but fast increase of residential mortgage loans by commercial banks had triggered new concerns in recent years. Korean financial institutions have in general made remarkable progresses in improving risk management practices. The supervisory authorities (FSC/FSS) had exerted very strong influences on financial institutions to prompt improvements in their risk management functions. As a result, many of the large financial institutions have made noticeable progresses in adopting advanced risk management technologies and risk-based decision making procedures, even medium- and small-sized financial institutions have been rather slow in progress. Due to lack of experience and insufficient dada, however, many financial institutions are still struggling to fully utilize new risk management technologies. Proactive supervisory measures have become ever more important to maintain soundness and safety of the financial system, because most of large financial institutions still pursue similar asset-origination strategies. Early adoption of Basel II and similar risk-based supervisory criteria and strict implementation of Pillar 3 will be essential to maintain stability of the financial markets. Expanding the pool of risk management professionals is also a task that should not be ignored.