Bank of Korea warns of financial risks from failed home loans

(Bloomberg) – Bank of Korea Governor Rhee Chang-yong has flagged rising financial sector risks amid rising home loan defaults, even as the broader housing market recovers slowly.

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“In the medium and long term, it is necessary to find a way to smoothly deleverage household debt in cooperation with the competent institutions so that financial imbalances no longer accumulate,” Rhee said in the text of a speech. which he delivered on Monday to mark the central bank’s 73rd birthday.

The BOK’s ability to deal with this risk may be more limited today, as more loans and assets have been transferred to non-bank financial companies, which the BOK does not supervise. The deposit share of these alternative institutions has already exceeded that of banks, and they are highly interconnected, he says in the text.

“As the importance of the non-banking sector and the complexity of the system have increased, it is difficult to achieve the goal of financial stability for the entire national economy by targeting only banks,” Rhee said. He called for enhanced cooperation with supervisory authorities and “if necessary, measures to achieve financial stability objectives should be designed”.

Rhee also spoke about overall economic conditions, saying it’s still too early to be convinced that inflation is slowing, as core inflation is taking longer to subside. A “sophisticated policy response” is needed to deal with changing growth momentum and price pressures, adding that the BOK must prepare for the possibility of changes in the current account balance and liquidity levels appropriate.

The central bank maintained key rates at its May meeting for a third straight meeting, while reinforcing the message that another hike could be possible amid persistent inflation. Consumer prices fell in May, although core inflation remains high.

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