A recent analysis by the Bank of Korea indicated that as global trade conflicts escalate, 7 out of 10 corporations will reach a point where they cannot even pay the interest on the money they earn.
The Bank of Korea conducted a stress test in its 'Financial Stability Report (June 2025)' published on the 25th, analyzing the impact of increased domestic and external uncertainties on the overall financial system.
The test was conducted in two scenarios: a 'shock' scenario assuming deepening pessimistic outlooks on global trade conflicts, and a 'severe' scenario in which domestic demand and exports concurrently decline, leading to heightened credit risk.
The analysis showed that both scenarios resulted in a deterioration of corporate performance, significantly lowering the corporations' interest coverage ratio (a measure of the ability to pay interest, calculated by dividing operating profit by interest expense). The proportion of vulnerable corporations with an interest coverage ratio below 1, which was 43.7% at the end of last year, surged to 62.6% and 67% in the pessimistic and severe scenarios, respectively.
The ratio of banks' non-performing loans to corporate loans (the ratio of loans that are difficult to collect out of total loans) also doubled. Based on the end of last year, this ratio was reported at 0.7%, but it rose to 1.7% in the pessimistic scenario and 2.4% in the severe scenario.
In particular, under the severe scenario, the scale of non-performing corporate loans at domestic banks is expected to increase by approximately 16 trillion won annually compared to the end of last year (12 trillion won). By industry, the increase was led by export sectors such as petrochemicals and machinery equipment, as well as construction, real estate, and cyclical sensitive industries.
However, even if non-performing loans expand to the level of the severe scenario, the capital adequacy of domestic banks is expected to remain at a healthy level. The average capital ratio in the banking sector is estimated to drop by 0.4 percentage points and 1.4 percentage points, respectively, in the pessimistic and severe scenarios compared to the end of last year (16.3%). The average capital ratio remains above the regulatory standards (11.5-12.5%).
Meanwhile, the Financial Stress Index (FSI) worsened. The FSI is a comprehensive indicator that assesses the potential for financial instability resulting from the financial and real sectors. According to the study, the FSI rose to 27.6 in the pessimistic scenario, entering the risk stage (above 24), and soared to 47.1 in the severe scenario. This figure greatly exceeds the level of financial instability during the pandemic of the novel coronavirus infection (COVID-19), which stood at 25.8.
The Bank of Korea noted that "factors such as the downturn in the local real estate market, uncertainty in the global trade environment, and increased exchange rate volatility have a significant impact on the financial soundness and debt repayment capability of corporations," stating that "the impact of each factor is expected to vary by industry depending on characteristics such as export ratios and sectoral interconnections."
It continued, "Considering the differing impacts of increased domestic and external uncertainties on each sector, there is a need to prepare differentiated responses by industry," adding, "it is necessary to alleviate the concentration risk of financial institution loans, particularly concentrated in sectors like real estate, to reduce potential risks."