At a Base Interest Rate of 3.75%, Self-Employed Delinquency Rate Rises from 5.7% to 9.3%

Bank of Korea, Financial Stability Report

[Image source=Yonhap News]

[Asia Economy Reporter Seo So-jung] If the benchmark interest rate rises to 3.75%, the loan delinquency rates for vulnerable households and self-employed individuals are expected to increase by 1.7 percentage points and 3.6 percentage points, respectively. The risk of insolvency for marginal companies will also rise by 0.23 percentage points.

According to the financial stability report released by the Bank of Korea on the 22nd, assuming the benchmark interest rate increases by 2.00 percentage points from the level at the end of June (1.75%), the loan delinquency rate for vulnerable households is projected to rise from 5.6% to 7.3%, an increase of 1.7 percentage points.

Additionally, the loan delinquency rate for vulnerable self-employed individuals is expected to increase from 5.7% to 9.3%. The insolvency risk (the probability of transitioning to a default state within one year) for marginal companies will also increase from 3.52% to 3.75%, a rise of 0.23 percentage points.

The Bank of Korea stated, "If real estate prices adjust rapidly during the interest rate hike process, household net assets could significantly decrease, leading to a rapid increase in the proportion of high-risk households." According to the report, if the price of houses owned by each household falls by 20% compared to the end of June, the proportion of high-risk households?those with a high principal and interest repayment burden (debt service ratio, DSR, exceeding 40%) and those facing difficulties repaying debt through asset sales (debt-to-asset ratio, DTA, exceeding 100%)?will expand from 3.3% to 4.9%.

Furthermore, concerns were raised about increased liquidity risks for some non-bank financial institutions, such as securities companies, which have a high dependence on market-based borrowing. The Bank of Korea analyzed that if the real economy weakens and asset prices decline further, the capital ratios of some insurance companies, securities firms, and savings banks could fall below regulatory standards.

The Bank of Korea emphasized, "Policy authorities need to respond swiftly to financial instability that may arise during the market interest rate hike process through micro-level financial stability measures, strengthen monitoring of non-bank financial institutions, and continue selective support for vulnerable sectors. However, it is also important to enhance incentives for private sector self-help efforts to minimize moral hazard."