More personal insolvencies possible, central bank warns

Lee Sang-hyeong, Deputy Governor at Bank of Korea, speaks at a press conference held in central Seoul on Wednesday. [BOK]

Bank of Korea warned that rising rates may lead to an increase in personal and corporate insolvencies

The ratio of the household and corporate debt to the GDP was 219.4 percent as of the end of the first quarter, the central bank said in a report on financial stability on Wednesday. The rate is down 0.1 percentage point from the previous quarter.

"Raising the domestic policy interest rate in accordance with the global inflation pressure may raise the market interest rate, rapidly adjust the price of financial assets and cause the insolvency of vulnerable borrowers," the central bank said in a statement.

Outstanding household debt stood at 1,859.4 trillion won ($1.43 trillion) as of the end of the first quarter, up 5.4 percent on year. The increase was probably the result of borrowings for real estate, the bank said

Mortgages and lump-sum deposit loans were 67 percent of total household debt last year. A rise in debt contributes to a rise in spending but could ultimately restrict spending if loan payments rise too high, the bank warned.

Outstanding corporate loans totaled 1,609 trillion won in the first quarter, up 14.8 percent on year. A rise in raw materials prices and facilities and real estate investments were some of the reasons for the growth, the bank said.

The Bank of Korea said Korea's Financial Stress Index (FSI) reached the "warning" level in March.

FSI is a composite index that measures the degree of financial stress in an economy. A figure between eight and 21 is the "warning" range, and the figure above indicates "crisis."

It reached 6.2 in January, 8.9 in March and 13 in May.

The central bank also warned financial institutions about rate increases, especially savings banks and credit financing firms, like credit card companies, whose primary customers are vulnerable borrowers. They borrowed almost 80 percent of the total loans written by savings banks last year.

Vulnerable borrowers are people with multiple liabilities and low credit scores.

The banks said borrower insolvency may grow when the government's financial support for the self-employed ends in 2023.

The U.S. Fed Reserve's 75-basis-point increase this month was "not reflected in the latest financial stability report," said Lee Sang-hyeong, Deputy Governor at Bank of Korea, in a press conference held in central Seoul on Wednesday. "Various external risks, like acceleration of the rate hikes in the United States, a rise in prices of international raw materials and an economic slowdown in China will function as factors that disrupt financial stability."

BY JIN MIN-JI [jin.minji@joongang.co.kr]