Dokyu-sang "Closely Monitoring Non-Bank Household Loans... Reviewing Measures to Strengthen Regulations" (Comprehensive)

"Non-bank DSR regulations may also be strengthened"
"New 'Household Sector Economic Response Buffer Capital' to be introduced in Q4"
"Household loan growth rate linked to forecast fee... up to 10% discount or surcharge planned"

Dokyu-sang, Vice Chairman of the Financial Services Commission

[Asia Economy Reporters Kwangho Lee and Jinho Kim] The Financial Services Commission has decided to further strengthen 'risk management' of household debt, which has emerged as the biggest risk factor for the Korean economy. In particular, it targeted the non-bank sector, where household loans are rapidly increasing due to the balloon effect caused by strengthened regulations on banks. The plan is to tighten regulations further if household loans in the non-bank sector continue to rise.

On the 15th, Do Gyu-sang, Vice Chairman of the Financial Services Commission, held the '1st Household Debt Risk Management Task Force (TF) Meeting' via video conference at the Government Seoul Office and said, "If the excessive increase in household debt continues, it will cause serious side effects such as asset market bubbles and increased household burdens."

Vice Chairman Do diagnosed, "Household loans increased by 63.3 trillion won in the first half of this year, averaging 10.6 trillion won per month. Compared to the first half of last year (6.1 trillion won per month), the increase is larger, but compared to the second half of last year (12.6 trillion won per month), when household debt began to increase significantly, the growth rate has somewhat eased."

However, he evaluated, "Unlike the banking sector, where the increase was limited, the non-bank sector's increase has actually expanded. Considering the high housing transaction volume compared to previous years, the banking sector's management efforts can be positively evaluated, but risks are rising mainly in the non-bank sector."

Vice Chairman Do emphasized, "The financial authorities will establish a more detailed management system to ensure that the household debt growth rate this year is managed steadily within the 5-6% range. First, we will closely monitor the household debt management measures implemented from the 1st of this month, including the phased expansion of the borrower-level Debt Service Ratio (DSR), to ensure they take root in the market."

He also announced, "From next year, the increase rate and risk level of household loans will be linked to the deposit insurance premium, which will be discounted or surcharged by up to 10%." This means that financial companies will have their deposit insurance premiums lowered or raised depending on the household loan growth rate.

Furthermore, a new household sector countercyclical capital buffer will be introduced and implemented in the second half of this year. Regarding the currently differentiated borrower-level DSR regulation, he warned, "If the increase in household loans in the non-bank sector continues by exploiting regulatory arbitrage, we will promptly eliminate the regulatory arbitrage between the banking and non-bank sectors." This means that the authorities will not tolerate borrowers who take loans from banks and then additionally borrow from savings banks or others within the DSR standards, taking advantage of the higher loan limits in the non-bank sector, which also has higher loan interest rates than banks.

Vice Chairman Do also addressed so-called debt-financed investment (Bitt-u) and all-in investment (Yeong-kkeul) behaviors, saying, "We must keep in mind the risks of investing in risky assets with excessive leverage," and emphasized, "It is a principle that the results of investments made under one's own responsibility must be borne solely by the individual."