[Financial Stability Status] "When a Shock Occurs, Youth and Vulnerable Groups Are Affected First"

Bank of Korea Announces 'Financial Stability Situation (September 2021)'

[Asia Economy Reporter Kim Eunbyeol] Amid the ongoing ultra-low interest rate environment following the COVID-19 pandemic and the swelling of debt due to overheated asset investment, the Bank of Korea has focused on the younger generation in their 20s and 30s as well as vulnerable groups. It pointed out that when shocks such as falling housing prices and stock prices occur, the younger generation, which has taken on significant leverage, could face greater impacts, and vulnerable groups already relying on debt to survive the COVID-19 crisis might be unable to repay their debts. If this happens, the ripple effects could extend to the financial sector, prompting the Bank of Korea to emphasize caution. Recently, concerns have also emerged that tightening bank loans by financial authorities could cause spillover effects into non-bank sectors such as savings banks.

According to the 'Financial Stability Situation' report released by the Bank of Korea on the 24th, the proportion of household debt held by the younger generation has significantly expanded since the COVID-19 pandemic, maintaining around 27% since the end of 2020. Although it slightly decreased to 26.9% as of the second quarter of 2021, it remains at a high level. Considering the continuous growth in total household debt, the amount of household debt among the younger generation is also rapidly increasing. Using the household debt DB ratio released by the Bank of Korea to estimate the outstanding household debt of the younger generation, the debt size as of the second quarter exceeded 485 trillion KRW for the first time, reaching approximately 485.79 trillion KRW. The outstanding household debt of the younger generation was about 398.55 trillion KRW at the end of 2019, before the COVID-19 crisis, surpassed 400 trillion KRW last year, and has increased by nearly 20 trillion KRW this year.

A notable characteristic of the younger generation's household debt is that the proportion of jeonse (key money deposit) loans is 25.2%, which is significantly higher than that of other age groups (7.8%). Young adults, often in the early stages of their careers, tend to live in rental housing rather than purchasing homes, and have taken on debt using relatively less regulated jeonse loans to secure a place to live. The 'fear of missing out (FOMO)' phenomenon also plays a role, where if they cannot buy a house when others do, they fear they may never be able to buy one, leading to an increase in cases of 'Yeongkkeul' (borrowing to the limit, even to the extent of one's soul) to purchase homes. In the first half of this year, the younger generation accounted for 36.6% of apartment sales transactions in the Seoul metropolitan area.

Another factor contributing to the increase in debt among the younger generation is the rise in borrowing for stock investments. The growth rate of credit loans among the younger generation was 20.1% in the second quarter of this year, rising more sharply than other types of loans. Among the 7.23 million new accounts opened at major securities firms last year, 3.92 million accounts (54%) belonged to individuals in their 20s and 30s.

Currently, the delinquency rate on household debt among the younger generation remains low at 0.40%. However, as mortgage loans and credit loans?which require repayment of principal and interest?are increasing among this group, the total debt service ratio (DSR) for the younger generation stands at 37.1%, higher than other age groups. Particularly, the proportion of 'vulnerable borrowers'?those with multiple debts who are low-income or have low credit?is 6.8%, higher than other age groups. This means that despite having lower income than other age groups, their debt burden is heavier, making it more difficult for them to repay their debts.

A Bank of Korea official stated, "While the contribution of the younger generation to the overall increase in household debt has significantly expanded, loans linked to asset markets such as mortgage loans and credit loans are rapidly increasing. The expansion of asset holdings through increased borrowing leverage among the younger generation could be vulnerable to unexpected asset price adjustments and may hinder healthy consumption activities due to debt burdens."

In fact, using the household debt DB, the Bank of Korea measured the critical debt levels that households in Korea can bear. The critical levels for debt service ratio (DSR) and loan-to-income ratio (LTI), which restrict consumption, were 45.9% and 382.7%, respectively. The current average DSR is 36.1%, and LTI is 231.9%, indicating there is still room before reaching critical levels. However, the critical levels that low-income groups or the younger generation can bear are lower, and the proportion of borrowers exceeding these critical levels tends to be higher among those with lower income or younger age groups. Among low-income groups, 14.3% of borrowers exceed the DSR critical level, and among the younger generation, 9.0% have already surpassed the DSR critical level.

A Bank of Korea official explained, "These figures show that the debt burden among the younger generation and low-income groups is exceeding critical levels, leading to increased cases of reduced income." Examining the debts held by borrowers who have exceeded critical levels, the proportion of real estate secured loans was in the 60% range, significantly higher than the 40% range for borrowers below the critical level. The amount of debt these borrowers need to repay to meet critical levels is estimated to be between approximately 36 trillion and 72 trillion KRW.

Meanwhile, the Bank of Korea also reported that the number of companies with debt exceeding critical levels is increasing, restricting corporate investment. On average, the debt-to-equity ratio that restricts investment is 264.2%, far exceeding the current corporate debt ratio of 91.0%. However, companies with debt ratios high enough to exceed critical levels tend to be smaller in terms of assets and sales.

A Bank of Korea official pointed out, "In households, low-income and younger groups, and in companies, those with smaller assets and sales, may face constraints on consumption or investment due to excessive debt. While the average is safe, these areas could become vulnerable first when shocks occur."