BOK sees low chances of systemic risk amid rising debt, falling asset soundness

Financial institutions' soundness shows signs of deteriorating slightly in the face of rising debt and home prices, but there is little chance that the deterioration would cause a systematic risk, a central bank report showed Tuesday.

Bank of Korea Deputy Governor Lee Jong-ryeol speaks at a press briefing on Korea's financial status at the central bank's headquarters in Jung District, central Seoul, on Tuesday. [BANK OF KOREA]

Financial institutions' soundness shows signs of deteriorating slightly in the face of rising debt and home prices, but there is little chance of any financial imbalance and deteriorating asset quality causing a systemic risk, a central bank report showed Tuesday.

In its report on financial stability, the Bank of Korea (BOK) said the Korean financial system is stable, although there is the possibility of financial imbalance rising amid worsening risks at home and abroad.

The central bank said household and corporate debts are continuing to rise, with the delinquency rate also climbing.

Household loans extended by banks in Korea rose by the sharpest in over two years in August on increased demand for home-backed loans amid high borrowing costs.

Banks' outstanding household loans had come to 1,075 trillion won ($808.9 billion) as of August, up 6.9 trillion won from a month earlier.

The August gain is the largest since July 2021, when such loans rose 9.7 trillion won, and also marks the fifth consecutive on-month rise.

Borrowing costs in Asia's fourth-largest economy remain high following the BOK's aggressive monetary tightening aimed at controlling surging inflation.

Last month, the BOK kept its benchmark rate unchanged at 3.5 percent, the fifth straight month of rate freeze in the face of a murky growth outlook and moderating inflation.

The rate freezes came after the BOK had delivered seven consecutive hikes in borrowing costs since April last year.

The BOK report said the Korean stock and bond markets are facing increased volatility amid an extended tightening mode by the U.S. Federal Reserve and rising risks related to China's property market.

"Financial institutions' soundness has worsened slightly, but their resilience is still being maintained," the BOK said. "But it cannot be ruled out that a drop in asset prices contracts the financial system and the real economy."

It, however, said there is a low possibility of systemic risk arising even in case of widened financial imbalance and a deterioration in asset prices.

Yonhap