The Bank of Korea: "Decline in Household and Corporate Debt Repayment Ability Inevitable... Financial Stability Expected to be Maintained"

[Image source=Yonhap News]

[Asia Economy Reporter Jang Sehee] The Bank of Korea stated on the 24th that although the repayment ability of households and companies is inevitably expected to deteriorate due to the novel coronavirus infection (COVID-19), considering the favorable resilience, the financial market is expected to remain stable. However, it emphasized the need to prepare proactive measures to prevent the risk from spreading to the financial system in case of a decline caused by large-scale losses in financial institutions.

Min Jwahong, Director of the Financial Stability Bureau, said at the press briefing on the '2020 First Half Financial Stability Report' approved by the Monetary Policy Committee on the same day, "Recently, the financial system has generally been stable due to government policies, but since uncertainties are expected to persist for a considerable period, it is necessary to review potential risks."

The Bank of Korea emphasized that considering the recent credit supply situation by policy authorities, liquidity shocks are unlikely to materialize currently, but attention should be paid to changes in the situation. Director Min stated, "In particular, if employment conditions deteriorate to the level of the foreign exchange crisis, repayment ability will decline and loan defaults are expected to increase." He added, "If loan shocks prolong, the scale of potential non-performing loans may expand, especially in accommodation and food services."

Regarding the criticism that liquidity supply is not reaching the real economy, he evaluated, "Liquidity has been supplied due to the easing of monetary policy stance after the COVID-19 outbreak, resulting in improved financing conditions for households and companies." However, he noted, "It is also true that due to increased uncertainty about the domestic economic outlook, the liquidity has not sufficiently spread to consumption and investment but has flowed into real estate and asset markets."

In response, the Bank of Korea emphasized, "If the gap between the real economy and asset markets' strength continues, it could undermine financial system stability," and stressed, "Efforts are needed to ensure that liquidity supply connects to the real economy."

Regarding the bubble phenomenon in stock and real estate markets, he said, "It is too early to judge whether it is a bubble or not," and added, "It is necessary to observe the direction." He further stated, "If the financial asset market becomes excessively disconnected from the real economy, preparations to cope with the side effects caused by this may be necessary."

This content was produced with the assistance of AI translation services.