KDI FOCUS Household Debt Vulnerability and Directions for Risk Management 2015.05.07
Series No. No. 41, eng.
□ Korea’s households and banks seem relatively sound in terms of their loss-absorbing capacities. However, a number of worrying signs are present. Some of the negative indicators are the rising share of non-bank consumer loans; the large share of real estate out of household assets, borrowing in the form of short-term balloon payment loans, and the credit risk of low-income indebted households. Against this backdrop, a sound and effective risk management system needs to be designed based on a proper assessment of the current situation while differentiating normal from emergency measures and ex ante from ex post measures.
- The recent debate over household debt has included some mixed discussions in terms of risks to financial and social stability, micro-level conditions, and macro-level effects.
- The credit risk of households with loans from (systemically important) banks appears limited, while the risk of households with non-bank borrowings is relatively high.
- The majority of debt can be found in households whose repayment ability is relatively strong in terms of the level of income and (net) asset.
- The characteristics of asset and liability composition of household balance sheets have raised concerns about a liquidity mismatch between assets and liabilities and the risk of debt deflation.
- The large increase in household credit activity has led to a rise in the number of people in default, suggesting a need for a firm establishment of lending practices of financial institutions based on repayment abilities and an improvement in consumer debt-relief programs.
- Major tasks that lie ahead include a moderate degree of debt-deleveraging and mitigation of its downward pressure, stabilizing the loan structure, reconfiguring the consumer debt-relief programs, redefining the role of credit policies from the areas of social safety net, and improving labor market conditions and household income.
- Suitable responses should be chosen and implemented for different situations based on objective assessment and understanding on the given situations.
- Approaches for risk management should be designed in a way that differentiates between normal and emergency measures and between ex ante and ex post measures.
- Attention should be paid to the vulnerability of low-income borrowers though their credit risk may not pose systemic risks to the economy.
Ⅱ. Understanding the Risks of Household Indebtedness
Ⅲ. Major Future Tasks and Ideas for the Design of Risk Management System
Ⅳ. Summary and Major Implications
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