State-backed Banks' Policy Finance Surpasses 2 Quadrillion Won Mark, Raising Concerns Over Capital Buffers

As of the end of last year, the scale of policy finance from 17 public financial institutions surpassed 2,000 trillion won, reaching a record high of 2,025.5 trillion won. This represents an increase of 51.2 trillion won from the previous year.

Alongside this expansion of policy finance, the total debt of three state-backed banks—Korea Development Bank, Export-Import Bank of Korea, and Industrial Bank of Korea—also surpassed 900 trillion won, reaching 907.1357 trillion won for the first time. The increase in debt was primarily driven by expanded lending to small and medium-sized enterprises (SMEs) and micro-enterprises, as well as increased housing finance support. Industrial Bank of Korea saw the largest debt increase among the state-backed banks, with total debt rising by 25.8 trillion won from the previous year due to a surge in borrowings. The Korea Housing Finance Corporation also increased its debt by 3.7 trillion won by issuing more corporate bonds to cope with the rise in guaranteed loan defaults related to mortgage lending.

As of the end of last year, the average Basel III total capital ratio for Korea Development Bank, Export-Import Bank of Korea, and Industrial Bank of Korea stood at 15.58%, exceeding the supervisory authorities' regulatory standards. However, this figure fell short of the average for commercial banks, which was 15.83%. Even with relaxed regulations applied to some risk-weighted asset calculation standards due to the early adoption of the final Basel III rules, capital adequacy remained below the average for commercial banks. The analysis suggested that as the scale of policy finance expands, risk-weighted assets such as loans and guarantees also increase, and if capital expansion does not keep pace, financial soundness indicators could come under pressure. In particular, it was pointed out that an economic downturn or an increase in non-performing loans could eventually lead to the government bearing the burden of additional capital injections.

Profitability, however, improved. The combined net profit of the three state-backed banks last year was 9.7026 trillion won, a 66.1% increase compared to the previous year. Korea Development Bank recorded 5.2296 trillion won, Industrial Bank of Korea 2.7189 trillion won, and Export-Import Bank of Korea 1.7542 trillion won.

Guaranteed balances are also growing rapidly. The Export-Import Bank of Korea's guaranteed balance increased by 82.9% from 28 trillion won in 2020 to 51.2 trillion won last year. Over the same period, Korea Development Bank's guarantees grew by 88.0% from 8.3 trillion won to 15.6 trillion won, and Industrial Bank of Korea's by 63.9% from 3.6 trillion won to 5.9 trillion won. Government support provided to public financial institutions over the past decade amounts to 115.8015 trillion won.

In response, an official from a state-backed bank stated, "Key financial soundness indicators are well above the supervisory authorities' regulatory levels, and financial soundness management is continuously being carried out at the bank level." He added, "The analysis suggesting the need for capital expansion can be interpreted not as pointing to issues with state-backed banks' soundness, but rather as a suggestion that the government should consider the capital expansion necessary for carrying out policy finance."