[Inside Chodong] The Pitfall of the Ambiguous Dichotomy Between 'Autonomy and Government Control'

In the second half of 2021, the Moon Jae-in administration implemented a so-called ‘loan volume regulation’ that limited the loan growth rate to a maximum of 6% per financial institution to curb the rapidly increasing household debt caused by soaring housing prices and COVID-19 bailout funds. This was driven by the goal of controlling skyrocketing housing prices and the urgent need to address the rapidly growing household loans exceeding 1,600 trillion won.

With the implementation of the loan volume regulation, controversy over government intervention arose. Critics argued that the government’s artificial interference in the market undermined autonomy and deprived consumers of their choice. Financial consumer groups condemned it as an anti-market policy that regulated financial consumers, and during the National Assembly audit, a then-People Power Party lawmaker sharply criticized the policy, saying, “The ignorant volume regulation was carried out, and only consumers are suffering.”

Despite the criticism, the policy’s effects were dramatic. Even considering the real estate market downturn, the policy’s impact continued after the government changed, with household loan balances in 2022 decreasing by 7.3 trillion won (0.4%) compared to the previous year. This halted the trend of household loan increases, which had exceeded 100 trillion won annually over the previous five years.

In the third year of the Yoon Seok-yeol administration, which adopted policies completely opposite to the previous government, household loans have become problematic again. As asset prices, centered on Seoul, began to rise sharply, household loan balances surged, raising concerns. Now, with household loan balances exceeding 1,800 trillion won, there are growing worries that timely monetary and fiscal policies may become difficult to implement and that a vicious cycle of ‘external shocks - borrower insolvency expansion - financial institution distress contagion - financial system collapse’ could unfold.

The financial authorities found themselves in a dilemma. They were forced to change the Yoon administration’s stance, which had declared a relaxation of loan regulations. However, since the current government has emphasized the market and freedom, it could not be criticized for ‘government intervention.’ Therefore, unlike the previous government, they could not present ‘numbers’ to manage household loan growth rates, nor could they make direct comments on mortgage loan interest rates or loan product handling. (This gave rise to the policy of ‘self-regulation.’)

The dilemma led to market confusion. In a series of responses?‘setting a management target for household debt growth rate within the GDP growth rate → implementation of Stress Debt Service Ratio (DSR) Phase 1 → increase in mortgage loan interest rates in the financial sector → two-month postponement of Stress DSR Phase 2 → suspension of mortgage loan product handling in the financial sector’?financial institutions and consumers lost direction and were at a loss.

Moreover, the critical messages from the financial authorities toward financial institutions managing household debt through loan interest rate hikes and suspension of loan product handling cast doubt on the original rationale of self-regulation. “It would be better if clear guidelines were given.” A senior financial official expressed frustration at the financial authorities’ approach with such a response.

Within the financial sector, the financial authorities’ self-regulation policy is now perceived as a ‘de facto loan volume regulation.’ The conclusion is that it is ‘de facto government intervention.’ Although it is moving in line with the major framework of the household debt management strengthening plan announced on October 26, 2021, the financial authorities maintain strategic ambiguity by neither acknowledging nor actively responding to various criticisms. Their true intentions can be inferred.

Some argue that at this point, the government should acknowledge the necessity of intervention for household debt management and present clearer policy goals. Providing consistent signals to the market and allowing preparation is considered more effective. Regarding policy loan management, which is cited as one of the causes of household debt increase, it is better to design policies that allow financial consumers to plan in advance rather than creating anxiety with uncertainty about when and how changes will occur.

Government intervention, often called ‘government control,’ is sometimes necessary and timely. If the financial sector errs, the government must intervene despite criticism, as this is a principle of a sustainable national system. Household debt management is a critical issue requiring active government involvement. For the sake of the national economy, it does not matter if the policy was from the previous government or if the direction changes. Ambiguous actions trying to avoid immediate criticism through rhetoric may impose a greater burden in the future.

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