“Because of debt, we may fall into a’debt trap’ that cannot raise the standard interest rate.”
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Financial and Monetary Commissioners of the Bank of Korea expressed concern with a voice over the excess liquidity, which is being focused on the rapidly increasing household loans and asset markets. Although the situation is not good due to the novel coronavirus infection (Corona 19), there was an opinion that the future should pay much more attention to financial stability. In particular, it was pointed out that the surge in household debt should be dealt with seriously, as it may fall into a’debt-trap’ that cannot raise interest rates due to excessive debt.
According to the minutes of the regular meeting of the KFTC held on December 24 last year, which was released by the BOK on the 8th, the members of the KFTC said that in the process of debating the financial stability report, a warning sound about financial imbalances should be made clear. A financial commissioner said, “There is a need to clarify an early warning message about this as there is a growing concern that the financial imbalance will intensify, such as a surge in household credit and corporate credit and increased pressure on asset prices.”
There were also voices of concern about the so-called’debt investment’ of investing in debt. “It is also worth noting that the expansion of the leverage of the youth can be a risk factor in the macroeconomic side, such as constraining consumption,” said a member of the Financial Services Commission. In addition, it was suggested that savings banks are circumventing regulations related to mortgage loans through loans to lenders, while increasing real estate project financing (PF) loans, and that it is necessary to examine the risks.
They also ordered countermeasures for self-employed people who are suffering from the prolonged Corona 19. Another member of the Financial Services Commission said, “It is necessary to preemptively consider how to differentiate between self-employed households with insufficient liquidity and self-employed households with non-repayment status. I have to do it.” It was also pointed out that attention should be paid to the possibility of underestimating the credit risk of SMEs.
The bankruptcy commissioners are very concerned about the risk of poor household loans. As the scale of the increase in household loans last year was unusually large, it was also expressed that it is necessary to keep in mind that even if the scale of household loan growth this year is reduced compared to the previous year, it is at a higher level than in previous years.
There were mixed pros and cons on the opinion that the expression’more careful about the risk of financial imbalance’ should be included in the direction of monetary policy operation. A member of the Finance Commission insisted that the financial imbalance should be further emphasized when considering the recent changes in financial stability. In response, another member of the Bank of Finance also refuted that it should take into account that the expression may trigger an unintended market reaction in a situation where economic concerns do not go away. In December of last year, the BOK announced, “We will pay more attention to the risk of financial imbalances such as the inflow of funds into the asset market and the increase in private credit.”
A member of the Financial Services Commission said, “In the past, the International Settlement Bank (BIS) has warned of a debt trap, but it is necessary to seriously look at the growing situation of the economic entity’s debt, especially household debt. It is necessary to carry out the policy while keeping in mind the situations that may arise if the policies or measures taken properly are normalized in the future.”
/ Reporter Jo Ji-won [email protected]
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