If the Middle East war drags on, ‘risk polarization’ will deepen... Weak links such as regional banks and petrochemicals could be hit first

The Bank of Korea (BOK) released the results of an analysis that assumes a prolonged conflict in the Middle East, with a sharp drop in financial asset and won values and a surge in commodity prices, and examines the impact on the domestic financial system. The findings show stress emerging first at weaker points, such as a steeper decline in capital ratios at regional banks and a rise in non-performing loan ratios in vulnerable sectors.
In its Financial Stability Report published on the 26th, the BOK included stress test results that assess the impact on the financial system over the next two years if the Middle East conflict and the resulting asset shock materialize. The tests were run under two scenarios, labeled “pessimistic” and “severe.”
Under both scenarios, the capital adequacy ratio of deposit-taking institutions, which determines the financial system’s capacity to supply credit, declined. The drop was particularly pronounced in the severe scenario.
By type of institution, the decline was larger at regional banks and savings banks than at commercial banks. The capital adequacy ratio of commercial banks falls from 18.3% in the third quarter of last year to 16.7% two years later, a decrease of 1.6 percentage points. In contrast, the ratios at regional banks and savings banks are projected to drop by 3.1 percentage points and 4.3 percentage points, respectively.
This reflects factors such as falling regional real estate prices and deteriorating profitability of real estate project financing (PF). However, the BOK judged the overall situation to be sound, noting that the ratios do not fall below the regulatory minimums of 11.5–12.5% for banks and 7–8% for savings banks.
The pessimistic scenario assumes that geopolitical risks in the Middle East trigger a simultaneous plunge in financial assets such as equities and in the value of the won, to levels seen during the COVID-19 pandemic in 2020.
The severe scenario assumes a spike in commodity prices and a downturn in the real economy, creating an extremely harsh environment comparable to the Global Financial Crisis (GFC) of 2008.
As risk polarization intensifies, the ratio of substandard-or-below corporate loans at domestic banks rises more sharply in vulnerable industries. For petrochemicals and the steel industry, the ratio climbs from 0.62% at the end of last year to 1.80% two years later, nearly tripling. Other sectors see an increase from 0.57% to 1.37%, or about 2.4 times.
Lim Kwang-gyu, Director General of the Financial Stability Department at the BOK, said, "Under the severe scenario, we found cases where not only certain sectors but also individual financial institutions see their capital ratios approach or even fall below regulatory thresholds." He added, "There is a possibility that vulnerable firms will face funding difficulties, so close monitoring is needed."
For securities companies and insurance companies as well, capital ratios remain above regulatory levels, indicating generally solid loss-absorbing capacity. In the severe scenario, market losses amount to 17% of equity at securities companies and 28% at insurance companies, yet both their Net Capital Ratio (NCR) and Korean Insurance Capital Standard (K-ICS) ratios stay well above the 100% regulatory benchmark.
The BOK also measured how global asset price adjustments would affect liquidity. Under the severe scenario, the average liquidity coverage ratio stands at 113% for securities companies and 321% for insurance companies. Under the pessimistic scenario, the figures are 182% and 665%, respectively, in all cases exceeding the 100% regulatory requirement.
taeil0808@fnnews.com Kim Tae-il Reporter