[IPR Forum] "Most Collateral of Over-Indebted Borrowers is Real Estate... Financial Institutions Risk Insolvency During Downturn"

Yongbeom Kim, Invited Research Fellow at Korea Institute of Finance (Former Vice Minister of Strategy and Finance)

Kim Yong-beom, Visiting Research Fellow at the Korea Institute of Finance, is giving a lecture on the theme "The Future of the Global Economy and Investment in an Era of Turbulence, Balance, and Complex Crises" at the "2022 Asia Economy IPR Forum" held at the Bankers Hall in Jung-gu, Seoul on the 8th. Photo by Kang Jin-hyung aymsdream@

[Asia Economy Reporter Park So-yeon] It has been pointed out that the high proportion of non-bank loans among domestic over-indebted individuals, coupled with the fact that most collateral is real estate, could lead to financial company insolvency in the event of a real estate market downturn.

Former Vice Minister of Strategy and Finance Kim Yong-beom made this observation during a lecture titled "The Future of the Global Economy and Investment in an Era of Complex Crises" at the '2022 Asia Economy IPR Forum' held on the 8th at the International Conference Hall on the 2nd floor of the Bankers' Hall in Myeong-dong, Jung-gu, Seoul.

Former Vice Minister Kim pointed out, "Over-indebted individuals with a Debt Service Ratio (DSR) exceeding 70% are focusing on real estate investments such as housing and commercial properties, primarily through non-bank loans, and since most collateral is real estate, there is a high possibility of financial company insolvency in the event of a market downturn."

He mentioned, "In the case of over-indebted individuals, there is a very high possibility of a surge in defaults during the process of loan interest rate hikes, with increased interest burdens due to rising loan rates and banks' more conservative lending attitudes being the causes of increased defaults."

Concerns were also raised that domestic financial companies remain highly vulnerable during periods of interest rate hikes due to maintaining high proportions of variable-rate loans and short-term non-liquid funds.

Former Vice Minister Kim explained, "The reason Korean financial companies are very vulnerable to interest rate hikes is that the proportion of variable-rate loans is about 70% based on outstanding balances, and even higher based on new loan intake."

He pointed out, "On the funding side, the high proportion of short-term non-liquid funds such as demand deposits increases the likelihood of outflows during interest rate hikes, which acts as another vulnerability."

He continued, "During interest rate hikes, low-cost deposits leave, bank funding costs rise, and lending attitudes become more conservative with further rate hikes," adding, "The outflow of low-cost deposits was a direct cause of the financial crisis in the second half of 2008."

He also evaluated the crisis preparedness of domestic banks in terms of provisions and capital strength as weak. Former Vice Minister Kim said, "Compared to banks in advanced overseas countries, the provision coverage ratio against total loans is at the lowest level," explaining, "The short-term loan structure with interest-only repayment, low interest rate policies, and principal and interest repayment deferral policies are factors that reduce provisions."

He added, "In advanced countries such as the United States, large-scale provisions were accumulated regardless of delinquency rates when facing the COVID-19 pandemic crisis."

Kim Yong-beom warned, "We must be cautious about the possibility that the inflationary trend will continue for a considerably long period, not just a temporary price increase due to post-COVID economic recovery," forecasting, "In advanced countries like the U.S., wage inflation pressures are clearly being passed on to prices, especially in face-to-face service sectors, and global supply chain disruptions are becoming more complex and prolonged due to China's power shortages and rising logistics costs." He added, "The burden on monetary policy and the direction of short- and long-term interest rates are important," warning, "A drastic upheaval in asset markets such as stocks and real estate is inevitable."

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