Yoon Seok-heon “Concerns about interest rate rise… Should induce interest rate cap loans, etc.”

As concerns over the increased debt burden of borrowers (the borrowers) increased amid rising interest rates at home and abroad, Financial Supervisory Commissioner Yoon Seok-heon announced that it was necessary to launch various products such as’interest rate cap loan’. He also called for strengthening supervision on soundness of financial companies.

Director Yoon said at the executive meeting on the 23rd, asking for risk factors to be checked in relation to the growing market worries about the recent increase in domestic and foreign interest rates, the FSS said.

The US 10-year Treasury bond yield nearly doubled in less than three months from 0.91% at the end of last year to 1.72% on the 19th of this month. In conjunction with this, the 10-year Korean government bond yield also rose from 1.71% to 2.10% over the same period. If the interest rate on government bonds, which serves as an indicator of market interest rates, rises, the financing rate of banks such as bank bonds rises, and the debt burden of variable rate borrowers increases.

Director Yoon said, “The proportion of fixed-rate loans has risen so far, but there are still a lot of variable-rate loans.” He said, “If the borrower wants, it is necessary to induce the launch of various products so that they can utilize fixed-rate loans or high-interest rate loans that can mitigate the risk of rising interest rates,” he said.

The maximum interest rate loan is a product that limits the rate of interest rate increase to within a certain level during the rate increase period. In the case of a home mortgage loan with an interest rate ceiling launched in March 2019, it is designed to increase only 1 percentage point per year and up to 2 percentage points over five years. As of the end of last year, half (50.3%) of borrowers in charge of banks are using variable interest rates.

Director Yoon urged executives to pay attention to overseeing the soundness of financial companies as well. Director Yoon said, “In terms of financial company soundness, an increase in interest rates can lead to loss of valuation of securities, poor loans due to the interest burden of borrowers, etc., and liquidity risk may also increase.” He instructed the supervisor to make every effort to maintain sufficient loss-absorption capacity by accumulating provisions.”