The Bank of Korea: "Downward Pressure on Housing Prices Increases... Potential Deterioration in PF Loan Soundness"

View of downtown Seoul from Namsan [Image source=Yonhap News]

The Bank of Korea recently explained that as downward pressure on housing prices increases, there is a possibility of deterioration in the soundness of real estate project financing (PF) in the financial sector, and risk management should be strengthened.

According to the "September Financial Stability Report" released by the Bank of Korea on the 22nd, the outstanding balance of PF loans in the analyzed financial sector as of the end of June was 112.2 trillion won, showing a high annual growth rate of 14.9% since 2014, mainly in the non-bank sector.

This is interpreted as a rapid expansion due to the increase in real estate development demand, diversification of business in the non-bank sector, and alternative investment demand due to household loan regulations.

The PF loan delinquency rate was 0.50%, significantly lower than the 8.21% during the PF loan default crisis at the end of 2013, but it has turned upward in most sectors this year. The ratio of loans requiring attention also increased from 1.91% at the end of last year to 2.3% as of June.

Regarding the PF loan exposure ratio to capital, the banking sector was 12.9%, down from 37.4% at the end of 2010, just before the PF loan default crisis. However, insurance (12.6%→53.6%), credit finance companies (61.5%→84.4%), and securities firms (4.7%→38.7%) saw increases.

In the case of savings banks, the ratio fell from 260.7% to 79.2% during the same period but remained at a high level.

The Bank of Korea foresees that with the recent increase in downward pressure on housing prices, the risk of PF loan defaults may rise due to increased uncertainty in project execution and an increase in unsold inventory.

Considering the capital capacity of financial institutions, even if some PF defaults occur due to a downturn in the real estate market, the overall resilience of the financial system is expected to be maintained, but the resilience of some non-bank institutions with many small businesses and lower collateral value stability may be weakened.

Additionally, the Bank of Korea pointed out that some non-bank financial companies, such as securities firms that heavily rely on market-based deposits, should also be cautious of liquidity risks due to burdens from assuming contingent liabilities related to PF and concerns over PF loan defaults during market instability.

The Bank of Korea stated, "It is necessary to encourage financial institutions to strengthen risk management and enhance their loss-bearing capacity to prevent PF loan defaults from spreading to financial system instability," and "going forward, the Bank of Korea plans to strengthen monitoring of risks related to PF loans through cooperation with supervisory authorities and seek countermeasures."

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