Real Estate Loan Risks Shift from Banks to Non-Banks... "Total Volume Management Needed"

Korea Institute of Finance Report
Real Estate Finance Exposure Increased by 10.3% YoY Last Year

[Image source=Yonhap News]

[Asia Economy Reporter Ki Ha-young] As the risk exposure amount of real estate finance, including loans, is increasing in the non-bank sector, advice has been given that appropriate total volume management is necessary.

Shin Yong-sang, Senior Research Fellow at the Korea Institute of Finance, stated this in a report titled "Expansion of the Scale of Domestic Real Estate Finance Risk Exposure and Policy Response Directions" on the 18th. Real estate finance exposure refers to the total amount of credit extended to households and real estate-related companies, as well as funds invested in real estate-related financial investment products.

According to the Bank of Korea, as of the end of last year, domestic real estate finance exposure stood at 2,279 trillion won, an increase of 10.3% (212 trillion won) compared to the end of 2019. The growth rate, which was in the 7% range in 2018 and 2019, jumped to double digits. Accordingly, the ratio of real estate finance exposure to nominal Gross Domestic Product (GDP) rose by 10.7 percentage points to 118.4%. This is the highest level since the real estate finance exposure statistics began in 2010.

Looking only at the final risk burden borne by financial institutions, the non-bank sector, which has relatively weaker risk management and loss absorption capacity, increased significantly to 44.1 trillion won, surpassing banks at 35 trillion won. Regarding this, Research Fellow Shin said, "A balloon effect has appeared where risk is shifting from the banking sector to the non-bank sector," and emphasized, "The trend of spreading domestic real estate finance risk suggests the need for detailed response strategies by risk type and burden bearer, including appropriate total volume management."

Research Fellow Shin explained, "From the perspective of total volume management, a separate target level for the growth rate of real estate exposure should be set, and specific directions such as allowing gradual adjustments of loan interest rates should be presented. Considering that the money multiplier and velocity of money circulation have rapidly declined so far, the target growth rate for the overall credit scale in the economy should be set slightly above the nominal GDP growth rate, but a separate target for real estate exposure should also be considered." The money multiplier is an indicator showing how well the funds circulating in the market are being utilized.

He also advised, "Considering that real estate-related corporate loans have increased mainly in the non-bank sector, various supplementary measures should be devised, such as the end of the temporary principal and interest repayment deferral due to the COVID-19 crisis."