The Financial Services Commission (FSC) evaluates that it has 'escaped the crisis phase of real estate project financing (PF).' It has determined that the likelihood of the deterioration of real estate PF transitioning into a systemic risk in the financial market has decreased. This is essentially declaring victory in the 'war on real estate PF.'
According to the financial sector on the 18th, the FSC will hold a meeting to assess the situation of real estate PF in the first week of July. The FSC is expected to conclude that the crisis originating from real estate PF has ended in next month's meeting. The financial authorities believe they have passed the crisis phase thanks to the successful implementation of the real estate PF soft landing measures first prepared in May of last year. Financial authorities are reported to have positively viewed the policy impact during a previous assessment meeting held in March this year, noting that they have 'gained the upper hand.'
The main reason the FSC believes it has overcome the crisis situation is the reduction in the scale of non-performing real estate PFs. As of the end of last year, the scale of non-performing real estate PFs graded as C (caution) and D (suspected deterioration) amounted to 23.9 trillion won. Of this, 9.1 trillion won (38.1%) has been restructured or resolved by the first quarter of this year. The financial authorities announced last month that a cumulative resolution of 12.6 trillion won (52.7%) is expected to be achieved by the end of the first half of this year. The financial authorities are currently updating the resolution performance according to the latest data ahead of next month's meeting and expect to successfully achieve their initial target of about 12 trillion won.
The prevailing view among financial authorities and outside experts is that the remaining non-performing assets will not destabilize the financial system. This is due to financial companies having conservatively built up loan loss reserves over the past few years, increasing their shock absorption capacity. If financial institutions have adequately accrued loan loss reserves, losses can be mitigated même if loan recoveries are not possible. As of the end of last year, the loan loss reserve ratio for savings banks and mutual finance sectors, assessed to be vulnerable to real estate PF crises, exceeded 110%.
Improvements in the quality of real estate PF projects are also ongoing. According to NICE Investors Service, during the fourth quarter of last year, the resolution of business sites in the secondary financial sector was focused on bridge loans and land collateral loans. Bridge loans and land collateral loans are classified as riskier assets because they have greater loss potential than regular PFs. At the same time, since the end of last year, large developers have been participating, securing business viability in newly attracting real estate PF projects. As unhealthy businesses exit the market, quality new projects are coming in, thereby reducing the threats to financial stability.
Moving forward, the FSC plans to encourage the resolution of remaining non-performing assets and refine the details of improvements to the real estate PF system. While the urgent issues have been addressed, the FSC's perspective is that there is still no reason to be complacent. An FSC official said, 'We will continue to monitor the non-performing situations of business sites in non-capital areas where the resolution speed is slow' and added, 'We plan to set regulations regarding minimum equity requirements for developers through discussions with the industry.'