[Teheran-ro] The Bare Face of Shadow Banking

The suspension of redemptions in United States private credit funds has once again exposed the bare face of shadow banking. On Wall Street, some are even raising the possibility of a "financial crisis." The mood in South Korea’s financial market, however, is markedly different. At his first day of work on the 31st of last month, Bank of Korea (BOK) governor nominee Hyun-Song Shin was asked by reporters about the credit risks in U.S. private credit. He assessed, "Given the share it accounts for in the system, it is not at a level that warrants serious concern for our country." The Financial Supervisory Service (FSS) also drew a line at its monthly press briefing last month, saying that the deterioration in overseas private credit markets would have only a limited impact on the South Korean market.
The saying that "when the United States catches a cold, South Korea comes down with pneumonia" is not a thing of the past. The global economy and South Korea are now even more tightly and intricately connected than before. No one can predict how far the current private credit turmoil will spread. External shocks can easily strike at the weak links of the South Korean economy. That weak link is corporate liquidity.
Over the past decade, South Korean companies have also been masking this "weak link" with financial engineering. After a series of capital market incidents around 2010 involving STX Group, Tongyang Group and Hanjin Shipping, corporations and investment firms rushed to securitize anything they could get their hands on. Asset-backed securities based on purchase cards, cashier’s checks and trade receivables were sold even to retail investors, lured by "high interest rates."
Restructuring of so-called zombie companies slowed, while potential risks spread all the way to individual investors. The Homeplus case is a prime example, exposing structural vulnerabilities in the securitization of card receivables. In recent years, price return swap (PRS) trades have also spread among large corporations like a fad. Amid this proliferation of financial engineering, NICE Investors Service recently sounded an alarm. In a recent report, it pointed out that asset-based funding such as sale and leaseback deals, Real Estate Investment Trusts (REITs), PRS and Total Return Swaps (TRS) is expanding rapidly, and noted that these methods effectively pull forward the use of high-quality assets and future cash flows.
As a result, South Korea now finds itself on thin ice, where the potential for a global liquidity squeeze intersects with the structural vulnerabilities of domestic companies. On top of this come risks from the exchange rate, low growth and high interest rates. The won–dollar exchange rate has climbed above 1,500 won, and oil prices have hit new highs amid the United States–Iran war. Since the beginning of the year, foreign investors have been net sellers of nearly 70 trillion won in the domestic stock market alone. Yet at the main gate of the Korea Exchange (KRX) in the heart of Yeouido, a huge banner reading "KOSPI 6000" still hangs, as if wishing the index would reach that level. The market continues to seek comfort in numbers. We need to recognize that crises start not with numbers, but with structures. It is time to scrutinize the opaque structure of the financial market.
khj91@fnnews.com Reporter