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🇰🇷 South Korea /Economy & Trade

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

From Hankyoreh · () Korean

Translated from Korean, summarized and contextualized by DistantNews.

At a glance

News Official statement Context piece
  • South Korea's financial system is assessed as generally stable, but rising housing prices and increased debt-fueled asset investment are identified as potential risks.
  • The Bank of Korea noted that while household debt-to-disposable income has decreased, the proportion of vulnerable borrowers has risen.
  • The central bank suggested that a policy rate increase may be necessary depending on inflation, economic trends, and financial stability risks.

South Korea's financial system is largely stable, but potential risks loom from renewed housing price increases in Seoul and other metropolitan areas, alongside a rise in debt-financed asset investments, the Bank of Korea (BOK) stated on June 24. In its "First Half Financial Stability Report," the central bank acknowledged the overall stability while flagging these factors as areas requiring attention.

The report indicated that while the household debt-to-disposable income ratio has declined from its peak, the proportion of vulnerable borrowers has increased. As of the end of the first quarter, these borrowers, defined as those with loans from three or more financial institutions, falling into the bottom 30% of income earners, or possessing a credit score below 664, represented 6.7% of the total, up from 6.4% in the third quarter of the previous year.

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

— Bank of KoreaSummarizing the key findings of the financial stability report.

Corporate lending has seen a slight increase, particularly among banks and large enterprises. However, the corporate default rate, after a period of decline, has begun to rise, reaching 2.43% by the end of the first quarter. The BOK highlighted that construction, real estate, and wholesale/retail sectors are particularly vulnerable, posing a risk of contagion to financial institutions.

The proportion of vulnerable borrowers has risen.

— Bank of KoreaHighlighting an increase in borrowers facing financial difficulties.

Domestic banks' non-performing loans have grown substantially since September 2022, reaching 17.7 trillion won ($12.7 billion) by March 2024. The central bank noted that, unlike previous periods where large corporations were the primary source of defaults, the current trend is largely driven by small and medium-sized enterprises, with defaults spreading across various industries due to delayed recovery in service sectors like wholesale and real estate.

Considering these factors, the BOK suggested that a policy rate increase might be necessary at an appropriate time. This decision would depend on inflation pressures, economic performance, and evolving financial stability risks. The current benchmark interest rate stands at 2.50%.

We need to increase the base rate at an appropriate time considering inflation pressure, economic trends, and financial stability risks.

— Bank of KoreaIndicating a potential future monetary policy adjustment.
DistantNews Editorial

Originally published by Hankyoreh in Korean. Translated, summarized, and contextualized by our editorial team with added local perspective. Read our editorial standards.

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