Bank of Korea: Financial system stable, but housing prices and debt-fueled investment pose risks

South Korea's financial system remains largely stable, but potential risks are emerging from resurgent housing price growth in Seoul and other metropolitan areas, coupled with increased debt-financed asset investments, the Bank of Korea (BOK) reported on June 24. The central bank's "First Half Financial Stability Report" highlighted that while the overall system is sound, these factors warrant attention.

“

Our country's financial system is generally stable, but rising housing prices and increased debt-fueled asset investment are potential risks.

The Financial Instability Index (FSI), which measures short-term stability across various sectors, has risen compared to the previous year. This increase is attributed to continued selling by foreign investors in the domestic stock market and a rise in household debt, particularly linked to property price increases. The FSI stood at 17.2 in May, a decrease from March and April but higher than December's 16.3. The index is evaluated on a scale where below 12 is 'normal,' 12-24 is 'caution,' and above 24 is 'crisis,' with 100 representing the January 1998 foreign exchange crisis.

While the household debt-to-disposable income ratio has seen a slight decrease, the BOK noted an increase in the proportion of vulnerable borrowers. As of the end of the first quarter, this group, defined as those with loans from three or more financial institutions, income in the bottom 30%, or a credit score below 664, constituted 6.7% of borrowers, up from 6.4% in the third quarter of last year.

“

The Financial Instability Index (FSI) has risen compared to last year, reflecting foreign investors' stock sell-offs and increased household debt linked to property.

The central bank also pointed to a rising default rate among corporations, particularly in vulnerable sectors like construction, real estate, and wholesale/retail trade. Non-performing loans in domestic banks have grown to 17.7 trillion won ($12.7 billion) as of March, up from a low of 9.7 trillion won in September 2022. Unlike previous periods where large corporations drove defaults, the current trend shows an increase primarily among small and medium-sized enterprises.

“

The proportion of vulnerable borrowers and the corporate default rate are increasing, particularly in construction, real estate, and retail sectors.