April 27, 2024

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Accommodative monetary policy increases commercial banks’ appetite for risky assets as they try to seek higher profits amid a low interest rate trend, a report said on Feb. 10.

“When market interest rates move down, triggered by a central bank rate cut, banks have to cope with a drop in their profits from corporate and household loans,” said Kim Ui-jin, one of the co-authors of the report published by the Bank of Korea.

“Consequently, banks engaged in more risk-taking actions to make up for the drop in earnings.”

For example, they increased high-risk, high-return letter of credit loans and reduced mortgage loans that are secured with collateral. Such risk-weighted assets have hurt their balance sheets, which is closely monitored by financial authorities, Kim said.

“Banks with better profitability and higher net profit margins don‘t need to be risk-takers,” Kim pointed out.

By Ram Garikipati and newswires (ram@heraldcorp.com)