South Korea will raise the target ratio of fixed-rate loans next year in order to reduce risks from rising interest rates, the country’s top financial regulator said Monday.

At a meeting jointly held by the Financial Services Commission and Financial Supervisory Service to review financial risks, the authorities vowed to brace for increasing uncertainties at home and abroad by taking timely measures to keep the market stable. 
 

One of the measures FSC Chairman Yim Jong-yong chose was to expand the proportion of fixed-rate loans from 42.5 percent to 45 percent. The FSC offers the proportion to commercial banks as a guideline for their allocation of loan programs.

Yim said they will induce more people to borrow amortized loans -- for which borrowers repay the principal and interest at the same time over a specific period of time -- by setting the government’s target ratio at 55 percent from the initial 50 percent.

“Efforts to improve the quality of the household debt should be doubled as the pace of debt growth accelerates,” Yim said at the meeting.

The total household debt of Asia’s fourth-largest economy stood at 1,295.8 trillion won ($1.09 trillion) as of the third quarter of this year. The figure has already exceeded 1,300 trillion won, according to economic experts.

“Banks should not induce consumer to choose floating rate loans especially in a period of rate hikes,” he said. “Such unhealthy sales practices will be strictly checked.”

The massive debt is considered a serious risk that would increase financial costs on ordinary households next year as the US Federal Reserve is highly forecast start raising its fund rates at a faster than expected pace due to US President-elect Donald Trump‘s fiscal expansionary policy.

Yim also called on commercial banks and other financial institutions to enhance their foreign exchange soundness in preparation against capital outflows.

“All related private institutions need to share efforts to reduce the systemic risks of the financial market,” the chairman said.

FSS Gov. Zhin Woong-seob pointed out foreign exchange liquidity is a “fragile loop” of the country’s financial system.

“The FSS will monitor conditions of overseas financing including re-funding ratios and spreads on a daily basis,” Zhin said. 

By Song Su-hyun (song@heraldcorp.com)