[Financial Stability Status] Household Debt Risk Level Hits Highest Since Card Crisis

Bank of Korea 'Financial Stability Situation'
Gap Between Real Economy and Household Debt Widens to Highest Level Since 2002 Card Crisis

*Source: Bank of Korea

[Asia Economy Reporters Eunbyeol Kim, Sehee Jang] Due to the COVID-19 pandemic, the scale of household debt in South Korea has surged to an all-time high, creating the largest gap with the real economy in 18 years. The size of the debt is considered excessively large given the reality of the economy. The combined private loans, including household and corporate loans, have far exceeded twice the country's Gross Domestic Product (GDP). A significant portion of the debt has flowed into asset markets such as stocks and real estate, and with interest rates fluctuating, the number of economic agents unable to repay their debts has also increased.

According to the “Financial Stability Report (March 2021)” released by the Bank of Korea on the 25th, the ratio of household and corporate loans (private credit) to GDP at the end of last year was 215.5%, up 18.4 percentage points from a year earlier. The household credit gap (the difference between the household credit-to-GDP ratio and the long-term trend), which indicates the gap between the real economy level and the increase in household debt, recorded its highest level since the fourth quarter of 2002 (7.4 percentage points), when the credit card crisis occurred. The household credit gap represents the difference between the normal credit growth rate and the actual growth rate, meaning that recent credit growth rates, including loans, have significantly deviated from the normal trajectory. The gap between corporate debt and the real economy (corporate credit gap) was also 9.2 percentage points, approaching the level seen in the third quarter of 2009 (10.6 percentage points), right after the financial crisis.

The credit gap is a debt risk assessment indicator that shows how much the ratio of private credit (household and corporate debt) to nominal GDP deviates from the long-term trend. The faster the ratio of household and corporate debt to GDP increases compared to the past, the larger the gap becomes. The Bank for International Settlements (BIS) also pointed out on March 3 that Korea’s private credit gap had reached an all-time high.

Household debt stood at 1,726.1 trillion won at the end of last year, up 7.9% from the same period the previous year. The quarterly growth rates have been accelerating, with 4.6% in the first quarter, 5.2% in the second quarter, and 7.0% in the third quarter of last year. Corporate loans reached 2,153.5 trillion won at the end of last year, a 10.1% increase from the end of 2019.

Debt risk signals are appearing in various areas. The number of self-employed households classified as “high-risk households” due to their weak ability to repay debt increased by more than 80,000 households over nine months to 192,000 households. Their financial debt also nearly doubled to 76.6 trillion won during the same period. The proportion of corporate loans held by companies at high risk of default has also exceeded 10%.

Professor Sangbong Kim of Hansung University’s Department of Economics said, “Interest rates are likely to rise in the second half of this year, and since loans have been directed toward stocks or real estate, borrowers will inevitably suffer if interest rates increase.”

Min Jwahong, Director of the Financial Stability Bureau at the Bank of Korea, also stated, “Private debt has flowed into asset markets, causing asset prices to surge and financial imbalances to deepen. There is a possibility that credit risks will materialize, especially in vulnerable sectors, when government support measures end.”

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