(Bloomberg) — South Korea is emerging as a closely watched weak link in the $63 trillion world of shadow banking.
Real estate exposure has been showing cracks at home and abroad after interest rates rose, prompting financial firms including T. Rowe Price Group Inc. and Nomura Holdings Inc. to express concern about stress in shadow loans to the sector.
Delinquency rates at one key group of Korean lenders nearly doubled to 6.55% last year, while economists at Citigroup Inc. estimate 111 trillion won ($80 billion) of project-finance debt is “troubled.” Korean shadow-bank financing to the real estate sector rose to a record 926 trillion won last year, over four times the level a decade ago, data from the Korea Capital Market Institute show.
Policymakers have stemmed contagion risks by expanding certain loan guarantees, but a shock restructuring announcement late last year by builder Taeyoung Engineering & Construction Co. underscored the threat of flareups. The firm will need a debt-to-equity swap of about 1 trillion won to erase capital impairments, its largest creditor said last week.
Such restructurings stand to worsen strains among shadow banks—as non-bank lenders are often called. The part of that sector with activities that may pose stability risks is large compared with other advanced economies, and is second only to the US in relative size, according to data from the Financial Stability Board.
“What is happening in Korea is probably a microcosm of what could be happening elsewhere,” said Quentin Fitzsimmons, a global fixed-income portfolio manager at T. Rowe Price Group Inc. “It has made me concerned.”
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