South Korea's Financial System Stable but Risks Loom: Central Bank

By Kim Boram

SEOUL, June 24 (Yonhap) -- South Korea's financial system remains stable, but rising housing prices and growing leveraged investments amid a stock rally could fuel financial imbalances, the central bank said Wednesday.

"Despite domestic and external uncertainties, Korea's financial system is generally assessed as stable, supported by strengthening growth in the real economy as well as the sound resilience of financial institutions and the country's external solvency," the Bank of Korea (BOK) said in its report on financial stability.

"However, amid significantly heightened volatility in domestic financial and foreign exchange markets, potential risks remain latent sources of instability and warrant close attention."

The BOK said the potential risks include mounting financial imbalances stemming from a renewed surge in housing prices in Seoul and other areas, increased leveraged investment and concerns over the spread of nonperforming loans in vulnerable sectors.

Household loans rose a moderate 3.5 percent on-year to 1,993.1 trillion won (US$1.3 trillion) in the first quarter but its monthly growth pace accelerated in recent months amid rising housing prices in the greater Seoul area.

"The growth in household credit is accelerating again, and it is important to note that credit risks remain high for vulnerable household borrowers and companies in certain industries," the BOK said.

The report noted that the financial market experienced strong volatility in the first half, driven by a weakening Korean won and net foreign capital outflows.

The Korean currency fell to the 1,500 won level against the U.S. dollar in recent months from the 1,400 won range in the first quarter, while foreign investors sold a net US$83.37 billion worth of local assets as of June 9.

The BOK also warned of increasing volatility in the stock market due to possible price corrections as an increasing number of people have engaged in leveraged stock purchases amid a recent market rally.

Households' non-mortgage loans grew at a faster pace in the fourth quarter of last year and the first quarter of this year, leading many to believe that much of the borrowed money flowed into the stock market.

"As market interest rates rise, expectations of asset price appreciation and risk appetite are expected to diminish, which should help mitigate the risk of accumulating financial imbalances," the BOK said.

"However, in the short term, there is a possibility that financial market volatility and the risk of defaults in vulnerable sectors will increase."

Citing rising inflationary pressure and solid economic growth, the central bank has repeatedly signaled a rate hike in the near future after holding the key rate steady for an eighth consecutive meeting in May.

Last week, BOK Gov. Shin Hyun-song vowed "proactive efforts to tame inflation" until it is convinced that inflation is clearly heading toward its target level.