"Household Debt Should Be Managed by DSR Rather Than Uniform Total Volume Regulation"

Bank of Korea-Korean Finance Association Policy Symposium
"Household Debt Requires Consideration of Borrowers' Repayment Ability"
"Gradual Reduction of Jeonse Deposit Guarantee System is Desirable"

"Management of household debt soundness should be conducted through standards that consider each borrower's repayment ability, such as the Debt Service Ratio (DSR), rather than uniform total volume regulations."

Professor Lee Yoon-soo of the Department of Economics at Sogang University made this remark on the 5th at the Bank of Korea headquarters in Jung-gu, Seoul, where he participated as a presenter in Session 1 of the policy symposium titled 'Challenges of Household and Corporate Finance in Korea,' jointly hosted by the Bank of Korea and the Korean Finance Association.

He assessed that the recent increase in household debt in Korea has been contributed to by a combination of factors including ▲rising housing prices ▲increased demand for housing-related financial services ▲profit-oriented management strategies of financial companies ▲and guarantee systems related to jeonse loans.

Recently, the expansion of real estate investment demand, such as the 'Yeongkkeul' phenomenon, contributed to the increase in household debt. In response, financial companies expanded the supply of related financial services by leveraging the fact that household loans offer higher profitability and safety compared to corporate loans, and that the capital requirements under the Bank for International Settlements (BIS) standards are lower. Furthermore, the jeonse guarantee system led to an increase in jeonse loans and gap investments, causing side effects such as rising jeonse prices and housing prices.

Regarding measures to manage the soundness of household debt, Professor Lee argued, "It is necessary to pay attention to the possibility of qualitative deterioration rather than the quantity of debt," and "Management should be conducted through standards that consider each borrower's repayment ability, such as DSR, rather than uniform total volume regulations."

He added, "At the same time as suppressing real estate investment demand, policies for the housing and real estate market should be implemented in parallel, including the disposal of collateral assets to clean up non-performing loans, household debt restructuring, dispersal of real estate demand in the Seoul area, and expansion of supply."

He evaluated that the jeonse guarantee system should be gradually reduced. He said, "The jeonse guarantee system causes moral hazard in banks' loan screening, expands incentives for gap investments, and leads to rising jeonse prices," and "It is desirable to reduce it step by step."

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