Bank of Korea flags financial stability risks as Iran war fallout persists

Published Thu, Mar 26, 2026 · 11:17 AM

[SEOUL] The Bank of Korea (BOK) said that the country’s financial system remained broadly stable in March, but warned that escalating Middle East tensions and structural vulnerabilities could amplify risks across markets.

BOK board member Lee Soohyung, who led the latest financial stability review, said financial institution resilience and solid external payment capacity have helped maintain overall stability. Still, she flagged a range of latent risks that could quickly surface under adverse conditions.

Lee pointed to the potential for heightened volatility in foreign exchange and financial markets as geopolitical tensions in the Middle East could trigger asset price corrections and cross-border capital shifts, according to a statement from the BOK that cited Lee’s views.

She also warned that uneven economic growth and tightening funding conditions could exacerbate risks in vulnerable sectors, raising the likelihood of credit stress.

The BOK’s report follows Prime Minister Kim Min-seok’s call on Wednesday (Mar 25) to further strengthen a preemptive response system, including preparations for worst-case scenarios, as turmoil in the Middle East is likely to be prolonged.

On housing, expectations for price gains have eased following government measures, but persistent increases in Seoul and the surrounding areas continue to pose risks of financial imbalances.

The South Korean economy is facing “a complex challenge”, with upside risks to inflation and downside risks to growth both elevated amid the possibility of prolonged Middle East tensions, the BOK statement said, citing Lee, who called for contingency plans to prepare for multiple scenarios.

The challenge is also set to confront Hyun Song Shin, the former head of research at the Bank for International Settlements, as he takes over as BOK governor next month. Economists expect he will lean towards a cautious but proactive stance, having previously emphasised the need for central banks to act early against inflation risks.

Lee added that authorities need to step up monitoring to prevent stress in vulnerable sectors from spilling over into the broader financial system, while strengthening financial institutions’ asset quality and liquidity buffers.

The central bank will closely track developments in financial and foreign exchange markets, as well as geopolitical risks, and stands ready to deploy market-stabilisation measures in coordination with the government if needed, the BOK said. BLOOMBERG