Home > Business > Economy

Bank of Korea warns of financial stability risks from high household debts, economic slowdown

Published: 25 Jun. 2025, 18:41

JIN MIN-JI
[email protected]

This photo taken June 22, 2025, shows apartment buildings in Seoul. [YONHAP]

Highly indebted self-employed businesses, soaring household debts and the economic slowdown are posing risks to the overall financial stability, the central bank said Wednesday.

In its report on financial stability, the Bank of Korea (BOK) said the country's overall financial system remains stable, but the weakening ability of the self-employed to repay debts and rising household debts caused by a rise in home prices in the capital area are feared to dent the financial stability.

The central bank also said that regional and nonbanking financial institutions' asset quality is at risk of deteriorating due to a rise in corporate credit risk.

"The central bank will decide the pace and degree of its easing policy by taking into account macroeconomic conditions and financial stability," it said. "The financial authorities need to implement concerted policies in a pre-emptive and consistent manner to deter financial imbalance."

Last month, the central bank cut its key rate by a quarter percentage point to 2.5 percent in an effort to prop up economic growth amid sluggish domestic demand and uncertainties stemming from Washington's sweeping tariff scheme.

It marked the fourth reduction since October 2024, when the BOK began a monetary easing cycle for the first time since August 2021. Since then, the central bank has lowered the policy rate by a total of 1 percentage point through May.

According to the central bank, the private sector's debts to the country's GDP stood at 200.1 percent as of end-2024, down 1.2 percentage points from three months ago.

But this year, home prices have gained traction, which again led to a rise in household debts.

Seoul's apartment market has been on an upward trend for 20 consecutive weeks since turning positive in early February, while the pace of gains accelerated recently as banks had eased lending regulations earlier in the year and the Seoul city government temporarily lifted its land transaction approval requirements.

Accordingly, household loans extended by local banks have increased for four consecutive months through May, with May recording the largest on-month gain since September 2024.

Yonhap