Emergency Patchwork Measures and Bursting Household Debt [Desk Column]

Household Debt Surges by 168 Trillion Won in Past Year... Exceeds 1,800 Trillion, Approaching GDP
Warning Signs of Korean Economy's Weakness Light Up, but Recycled Measures Repeat Every Administration
Structural Reform Needed Over Emergency Remedies

Hana Bank announced that it will limit the personal credit loan ceiling to "within the range of individual annual income." The photo shows the Hana Bank headquarters branch in Jung-gu, Seoul, on the 27th. Photo by Jinhyung Kang aymsdream@

[Asia Economy Lee Chohee, Head of Finance Department] The scale of domestic household debt as of the second quarter stands at 1,805 trillion won. This is close to last year's real Gross Domestic Product (GDP) of 1,836 trillion won, which represents the entire size of our economy. In particular, the amount of debt that has increased over the past year alone reaches 168 trillion won. This is the highest figure since related statistics began to be compiled in 2003, which is why household debt is pointed out as a time bomb for the Korean economy.

Amid growing concerns that household debt, increasing at an unprecedented pace, will trigger not only asset market instability but also financial distress, Go Seung-beom, newly appointed Chairman of the Financial Services Commission, declared a "war on household debt" as his top priority.

Since the end of last year, financial authorities have tightened lending in the financial sector. This was in response to witnessing the risks of household debt, which has been breaking monthly records amid the craze for debt-financed investment (debt investment) and borrowing to the limit (Yeongkkeul). As total loan volume was restricted, credit limits were reduced and interest rates rose. However, the increase did not stop. Consequently, regulatory pressure intensified. Overnight, not only banks but also insurance companies and savings banks began to suspend new unsecured loans. The combination of base rate hikes and loan regulations caused lending rates to rise rapidly. Although the increase in unsecured loans slowed in July, mortgage loans set new monthly records again. This only instilled fear and harm among genuine borrowers and proved ineffective.

What is the problem? Ten years ago, in 2011, when household debt approached 800 trillion won, the Lee Myung-bak administration announced the comprehensive household debt measures on June 29. The core was to block bank lending. However, household debt rapidly increased until the following year, surpassing 1,000 trillion won. The household debt measures introduced by the authorities in 2017 were similar. The gist was to "increase income to repay debt." At the time, there was widespread skepticism about how effective such a "comprehensive regulatory manual" policy could be beyond mere lending restrictions. The result was "what was feared came true." It was proven that policies based on total volume regulation aimed simply at lowering numerical graphs, and bureaucratic thinking focused only on reducing figures, cannot be an appropriate solution. This is why a redefinition of the direction to resolve household debt is necessary. While it is important to enhance the soundness of financial institutions and lower the debt-to-income ratio, policies must have safety nets to prevent falling into a crevasse.

On the 27th, Ko Seung-beom, the nominee for the Financial Services Commission chairman, attended the confirmation hearing held at the National Assembly and responded to questions from lawmakers. Photo by Yoon Dong-ju doso7@

It is somewhat possible to predict future events based on past experiences. Household debt is a time bomb for our economy. The higher a sandcastle is built, the greater the shock when it collapses. Just as the International Monetary Fund (IMF) crisis plunged the Korean economy into turmoil by delaying or postponing reforms for economic agents, the aftermath of a household debt explosion would be unimaginable.

At this moment, when low-income households are collapsing due to COVID-19 and the growth engine of the economy is weakening, it is realistically difficult to find a perfect solution to defuse the household debt time bomb. However, it is clear from past measures that simply tightening loans will not solve the problem. Household debt is similar to diabetes or heart disease. Patchwork measures will only perpetuate a vicious cycle where only low-income households and genuine borrowers suffer. More than emergency treatment, structural improvement is needed now more than ever.

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