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Korea’s financial vulnerabilities highest since 2008 financial crisis: BOK

Central bank says heated housing, digital asset markets have exacerbated financial imbalance

This undated file photo shows apartment complexes in Seoul. (Yonhap)
This undated file photo shows apartment complexes in Seoul. (Yonhap)
South Korea’s central bank said Monday that the country’s financial vulnerabilities had increased to their highest level since the 2008 financial crisis, calling for efforts to prevent a deepening of the financial imbalance caused by the heated real estate and digital asset markets.

The nation’s financial vulnerability index climbed to 58.9 in the first three months of 2021, surpassing 41.9, the figure it reported in the fourth quarter of 2019, before COVID-19 hit the country, the Bank of Korea said in its regular report on financial stability.

The financial vulnerability index is now at its highest level since 2008, when it hit 60 in the aftermath of the global financial crisis.

The index measures the vulnerability of the financial system in consideration of the degree of financial imbalance and the resilience of financial institutions through 39 indicators, including household and corporate debt growth rates as well as asset price growth rates.

The BOK chalked up the increase in the financial vulnerability index to debt accumulation and growing asset prices, including the prices of stock and real estate.

Pointing to soaring house prices in Seoul, the report warned of a possibility of real estate price correction in the event of an economic shock at home and abroad.

“It is necessary to pay attention to the possibility of insolvency of related (mortgage) loans.“

A surge in risk appetite for digital coins also played a role.

“Speculative demand and a sharp rise in prices despite the uncertain economic value of crypto assets suggest that risk-seeking tendency has spread in the asset market,” the bank said.

The outstanding debts of the country’s households stood at 1,765 trillion won ($1.55 trillion) at the end of March, up 9.5 percent from a year ago.

The growth of household debt accelerated last year, growing 4.6 percent in the first quarter of last year, 5.2 percent in the second quarter, 7 percent in the third quarter and 7.9 percent in the fourth quarter, according to the report.

As of the end of March, the ratio of household debt to disposable income came to 171.5 percent, up 11.4 percent from a year earlier, while the outstanding debts of local companies reached 1,402 trillion won, up 14.1 percent from a year earlier, the BOK said.

BOK Gov. Lee Ju-yeol has hinted at raising the key interest rate in the second half of this year amid signs of economic recovery. The central bank last month raised its 2021 growth outlook to 4 percent from 3 percent.

By Park Han-na (hnpark@heraldcorp.com)
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