Bank of Korea Warns of Financial Risk as Real Estate Loans Fail

(Bloomberg) — Bank of Korea Governor Rhee Chang-yong flagged growing financial sector risks amid a rise in real estate loan delinquencies— even as the broader housing market slowly recovers.

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“In the mid- to long-term, it is necessary to find a way to smoothly deleverage household debt in cooperation with relevant institutions so that financial imbalances don’t accumulate again,” Rhee said in the text of a speech he gave Monday to mark the central bank’s 73rd anniversary.

The BOK’s ability to address this risk may be more limited today since a bigger chunk of loans and assets has shifted to non-bank financial firms, which the BOK doesn’t oversee. The share of deposits by these alternative institutions has already exceeded that of banks, and they’re highly interconnected, he said in the text.

“As the importance of non-banking and the complexity of the system have increased, it is difficult to achieve the goal of financial stability for the entire national economy by targeting only banks,” Rhee said. He urged strengthened cooperation with supervisory authorities and “if necessary, measures to achieve financial stability goals should be devised.”

Rhee also spoke about overall economic conditions, saying that it’s yet too early to be confident that inflation is easing as core inflation is taking longer to cool. A “sophisticated policy response” is needed to address the changing dynamics of growth and price pressures, adding that the BOK needs to prepare for the possibility of changes in current account balance and appropriate liquidity levels.

The central bank held policy rates at its May meeting for a third straight meeting, while reinforcing a message that another hike may be possible amid sticky inflation. Consumer prices eased in May, though core inflation remains elevated.