BOK “Increasing Household Expense Loans, a Serious Situation”

Bank of Korea (BOK) is warning that “from the expansion of household expense loans, and with the resulting skyrocketing real estate prices, a financial crisis may arise.”

BOK announced in yesterday’s report, “Before and After the Financial Crisis of Korea and the Three Banks in North Europe,” that “after the foreign exchange crisis, it appears that household expense loans are showing a 40 percent increase in rate every year, and if the bubbles clear from the slumping businesses, a large collapse in household expense loans is a concern.”

In the report, it was pointed out that in a Korean commercial bank, the household expense loans took up 11.8 percent of the bank’s total assets at the end of 1997, but it remarkably increased to 29.7 percent by the end of 2002.

Also, it was analyzed that after the foreign exchange crisis, banks have been supplementing the slowdown in demands of funds in the enterprise sector, and from the process of searching for a relatively low risk plan in using the assets, house mortgage loans have greatly increased.

Following this, the cases of the three northern European countries, Sweden, Norway, Finland, which all showed prosperity in the late 1980s and went through a financial crisis in early 1990s, were introduced, and it was pointed out that the bubbles in the real estate and stock prices and the increase in household expense loans resulting from it can lead to a financial crisis.

In the report, it was stated, “After the financial crisis, the fundamental capital in Sweden and Norway banks, excluding the supplementary capital such as subordinated bonds from the standard equities of the Bank for International Settlements (BIS), accounted for approximately 70 percent, a great improvement.” It was urged that “the fundamental capital in Korean banks have accounted for 60 percent, but the capital structure needs to be more solidified by expanding the fundamental capital.”

Relating to this, Kim Byung-Yeoun, senior researcher of the Korea Institute of Finance, indicated, “During the bubble times such as when real estate prices rise, if the banks do not thoroughly inspect the use of the funds and the ability to refund when they are loaning household expenses, then there is a high possibility that it may lead to nonperforming loans.”

Meanwhile, entering this month, household expense loans in the major commercial banks have declined, but house mortgage loans have showed an increase.

The balance from household expense loans in Kookmin Bank decreased 114 billion won through this month until November 12. As of November 11, 283 billion won in Woori Bank and 612 billion won in Cho Hung Bank were reduced from their balances, respectively. At the beginning of last month, the household expense loans of these banks had increased significantly.

The house mortgage loans have totaled to increase by 5,400 billion won as of this month up to November 10.

BOK bank director Cho Ki-jun explained, “Banks are reducing credit loans and on the other hand, from the government’s real estate policies, the lowered LTV (Loan to Value) was applied to the speculative areas before November 13. The house mortgage loans were increased, and so the household expense loans had decreased.”

Joong-Hyun Park Keuk-In Bae sanjuck@donga.com bae2150@donga.com