Uncontrollable Household Loans... Financial Authorities Contemplate Additional Regulations (Comprehensive)

Discussion on Measures at Tomorrow's TF Meeting... Possible Reduction of DSR in Secondary Financial Sector

[Asia Economy Reporter Kwangho Lee] Despite financial authorities' efforts to tighten household loans, the increase in loans has not slowed, raising the possibility of additional regulations. Inside and outside the financial sector, there is speculation that the financial authorities may introduce a measure to lower the total debt service ratio (DSR) for borrowers in the secondary financial sector to the level of the primary financial sector.

According to financial authorities on the 17th, the Financial Services Commission will hold the '2nd Household Debt Risk Management Task Force (TF) Meeting' on the 18th, chaired by Do Gyusang, Vice Chairman of the FSC, to discuss household debt management measures.

Since Vice Chairman Do stated at the first meeting on the 15th of last month that regulations would be further strengthened if household loans in the secondary financial sector continue to increase, attention is focused on what message will be delivered at this meeting.

Since last month, the financial authorities have expanded the application of the 40% DSR limit in the primary financial sector to houses worth more than 600 million won in regulated areas to curb household loans. Also, since May, the loan-to-value ratio (LTV) regulation of 70% on non-housing collateral loans, previously applied only to mutual finance institutions, has been extended to the entire financial sector, including banks. Nevertheless, the craze for borrowing to invest (debt-financed investment) and borrowing to the limit (borrowing up to one's soul) continues unabated, especially among those in their 20s and 30s in the real estate and stock markets.

According to the FSC, household loans across all financial sectors increased by 15.2 trillion won in July, an expansion from the 10.3 trillion won increase in the previous month. Housing mortgage loans surged by 7.5 trillion won in one month, exceeding the 6.4 trillion won increase in the previous month. The net increase in other loans, such as credit loans, also rose from 3.9 trillion won in June to 7.7 trillion won in July. Notably, household loans in the secondary financial sector increased significantly, with a net increase of 5.6 trillion won last month, far surpassing the 3.9 trillion won increase in the previous month.

In July, 15.2 Trillion Won Increase Across All Financial Sectors... 5.6 Trillion Won Increase in Secondary Financial Sector

The financial authorities believe that borrowers who have reached their DSR limits have massively moved to the secondary financial sector. They are also paying attention to the inter-affiliate connections among banks, capital companies, and mutual finance institutions. Currently, the DSR limit is 40% for the primary financial sector and 60% for the secondary financial sector. This has led to a balloon effect where borrowers flock to the relatively less regulated secondary financial sector to obtain larger loans.

Vice Chairman Do warned, "If the increase in household loans in the secondary financial sector, which exploits regulatory arbitrage, continues, we will promptly eliminate the regulatory arbitrage between the primary and secondary financial sectors." Since the secondary financial sector has higher loan interest rates but more room in loan limits compared to the primary financial sector, the number of borrowers who take loans from the primary financial sector and then additionally borrow from the secondary financial sector within the DSR criteria is increasing, and this will not be overlooked.

A financial authority official said, "We are carefully monitoring market conditions and reviewing various measures through continuous meetings," but declined to elaborate further.

In addition to the DSR regulation on the secondary financial sector, the financial authorities plan to link the household loan growth rate and risk level to the deposit insurance premium from next year, applying discounts or surcharges of up to 10%. This means that financial companies' deposit insurance premiums will be lowered or raised depending on the household loan growth rate.

Furthermore, the financial authorities recently held meetings with bank credit executives and requested that the individual limits on credit loans such as overdraft accounts be lowered to the level of annual income. Currently, the credit loan limit at banks is about 1.5 to 2 times the annual income, but this is interpreted as an intention to reduce excessive credit loans by lowering it to the annual salary level.

"Consider Interest Rate Hikes Rather Than Excessive Regulations for Total Volume Control"

Experts advise that effective total volume management of household loans should be accompanied by interest rate hikes to suppress liquidity flows.

Shin Yongsang, Senior Research Fellow at the Korea Institute of Finance, stated in the report "Current Status and Preemptive Management Measures of Household Debt Risk," "In a situation where the total scale of household debt has surged and sensitivity has increased, even a small shock can trigger a crisis," urging the Bank of Korea to preemptively raise interest rates.

Professor Sung Taeyoon of Yonsei University's Department of Economics said, "The continuous increase in household loans despite government regulations is because there are actually many people who need funds," adding, "Rather than excessive regulations for total volume control, interest rate hikes to reduce liquidity supply itself should be considered."

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