[Inside Chodong] Do Not Judge the Financial Market by Political Logic

[Asia Economy Reporter Park Sun-mi] A country where people with low credit scores who cannot get a job borrow money from non-bank sources but pay bank-level interest rates. A country where you can buy your own home with a loan even if you don't have a large sum of money right now. A country that reduces interest rates if business is slow and repaying loans becomes difficult despite rising loan interest rates.

Most financial pledges put forward by the ruling and opposition presidential candidates target relatively financially vulnerable groups such as low-income earners and youth who find it difficult to raise funds at low costs under current conditions. It is rare to find pledges addressing financial industry support policies and development directions that can promote long-term growth of the financial sector. Most promises focus on cutting interest rates or enabling consumers to borrow more money. The repetition of such pledges may be evidence that current financial policies are failing to properly support financially vulnerable groups.

The question is how feasible these pledges are.

Presidential candidates Yoon Seok-yeol and Lee Jae-myung argue that the loan-to-value ratio (LTV) for purchasing real estate should be relaxed to 80% and 90%, respectively, to make it easier to buy homes. Of course, they claim that the relaxation should apply only to actual demanders such as those without homes, youth, and newlyweds. Considering that the government has never allowed LTV to exceed 70% until now, the figures of 80-90% are unprecedented.

For example, applying an LTV of 80-90% means that when buying a 300 million KRW house, you only need 30 to 60 million KRW. This is not problematic in a stable real estate market, but if housing prices fall by 20% as during the past foreign exchange crisis, the house becomes a "kan-tong ju-taek" (literally "empty shell house," meaning a house with a mortgage exceeding its value). Also, since younger people tend to prefer high-risk, high-return assets, if the perception forms that they can easily buy a home with loans, even after gaining repayment ability, they might invest in riskier assets rather than repaying debt, causing asset bubbles. Given that the debt service ratio (DSR) regulations are being strengthened to curb excessive household debt growth, relaxing only the LTV without adjusting the DSR is meaningless.

Candidate Lee’s pledge to provide youth dividends of 1 million KRW annually to those aged 19-29 and to lend up to 10 million KRW at bank-level interest rates also raises doubts about its effectiveness. While the pledge is understandable given that the 20s vote is a casting vote in this election, it is unclear how much a youth support fund of less than 100,000 KRW per month will improve young people’s lives. Some argue that the 10 million KRW basic loan could encourage 2030 youth to engage in "young-geul" (borrowing to the max) and "debt investment," potentially increasing financial risks.

Candidate Yoon’s pledge to transparently disclose the interest rate spread between deposits and loans at commercial banks also seems unlikely to be effective. Interest rates are prices determined by the market, and banks have been calculating and operating additional and preferential interest rates through the voluntary "Model Code for Loan Interest Rate Systems." Even if deposit rates rise to narrow the spread, banks will inevitably raise loan rates with a time lag to maintain profitability. Therefore, unless the system changes, periodic disclosure of the interest rate spread alone will not close the gap. This pledge is not much different in effect from the financial authorities’ current practice of reviewing interest rate levels whenever the spread widens.

Candidate Ahn Cheol-soo’s claim that maturity extensions and interest payment deferrals for small business loans should be extended at pre-rate hike loan interest rates is also controversial. The Bank of Korea has raised the base interest rate to curb inflation, and loan interest rates have risen accordingly. Refusing to apply this market logic to specific groups is unfair and could backfire by delaying the normalization of COVID-19 financial support policies. It is regrettable that instead of examining the effectiveness and feasibility of policies, political logic dominates market views, leading to repeated contradictory pledges aimed at courting votes.