[2023 National Audit] Lee Chang-yong "Most Concerned About Real Estate PF if Interest Rates Rise... Considering Increase if Household Loans Don't Decrease" (Summary)

Real Estate PF Linked to Financial Institutions Raises Financial Instability Concerns
Issues Arise When Housing Prices Fall More Than 30% from Peak

[Image source=Yonhap News]

Lee Chang-yong, Governor of the Bank of Korea, expressed concerns that real estate project financing (PF) would be the most worrisome area if the base interest rate is further increased in the future. Regarding concerns about the rise in household loans, he mentioned that regulatory policies would first be tightened again, and if the pace of household debt growth does not slow down, a serious consideration of interest rate hikes would follow.

At the National Assembly's Planning and Finance Committee audit held at the Bank of Korea on the 23rd, Governor Lee responded to a question from Hong Young-pyo, a member of the Democratic Party of Korea, asking, "If interest rates inevitably rise, what is the biggest concern?" by saying, "If interest rates are raised further, real estate project financing (PF) is the biggest concern in the current situation."

Regarding the impact on ordinary households, Governor Lee said, "Real estate loans are mainly concentrated among high-income earners, so their interest burden may increase," but added, "Real estate PF is connected to financial institutions, so there could be issues with financial stability."

In response to a question from Bae Jun-young, a member of the People Power Party, about what level housing prices need to reach to be considered stable, Governor Lee explained, "It is difficult to provide specific numbers, but broadly speaking, when real estate prices started to fall significantly after the PF incident in November last year, internal simulations at the Bank of Korea suggested that a drop of up to 30% from the peak would not pose major problems, but a further decline could cause issues."

Governor Lee added, "Financial institutions and PF can endure a drop of up to 30% from the peak, but if it falls more than that, difficulties will arise," and noted, "At that time, there were concerns about a hard landing, and when the February Monetary Policy Committee minutes were released, prices had fallen 18% in just one or two months, raising concerns that a continued downward trend would be problematic."

Questions on Measures Against Rapid Household Debt Increase... Lee Chang-yong: "Will Tighten Regulations"

On the same day, Governor Lee responded to multiple lawmakers' questions about measures against the rapid increase in household debt by stating that regulatory policies would be tightened again. He expressed the difficulty of considering financial and real estate PF instability caused by high interest rates when lawmakers asked, "Why not raise interest rates to curb household debt?"

Governor Lee explained, "If the Bank of Korea raises interest rates further, it can certainly curb household loans, but we must consider how to handle financial market stability issues that come with it. Also, inflation (consumer price index) once dropped to 2.3%, which is why the base rate was held steady." He added, "Household debt rose in the past one or two months but decreased in September. Currently, due to policy lags, we need to wait a few months to see if the situation is controlled."

He also explained that the recent easing of real estate regulations by financial authorities was a measure to respond to instability in the financial and real estate markets.

Governor Lee stated, "I believe it is my responsibility to gradually reduce the household debt-to-GDP ratio to below 100%, close to 90%, through interest rate policies and policy coordination with the government. However, if adjustments are made too quickly, the economy could worsen, so we will proceed slowly."

[Image source=Yonhap News]

Opposition Party Criticizes "Government Using Bank of Korea Temporary Borrowings to Cover Tax Revenue Shortfalls"

Additionally, when opposition lawmakers criticized that "the government is covering insufficient tax revenues through temporary borrowings from the Bank of Korea," Governor Lee responded, "If the government borrows continuously, it could become a structural issue, so the National Assembly should set limits."

Kim Joo-young, a member of the Democratic Party of Korea, stated, "The government borrowed 113.6 trillion won through temporary loans from the Bank of Korea by September this year, which is the highest amount compared to temporary borrowings over the past 10 years," adding, "The interest alone amounts to 149.7 billion won."

Kim criticized, "Although the government fully repaid the temporary loans at the end of September, considering the deteriorating revenue conditions, borrowing is expected to increase in the future. In this unprecedented tax revenue shortfall situation, emergency measures like temporary loans from the Bank of Korea have limitations in forming a safety net for our economy."

He further explained, "In the United States, the Treasury is prohibited from borrowing directly from the central bank, the Federal Reserve (Fed). Funding is only allowed through open market operations, and the U.S. Treasury publishes monthly fiscal reports in the form of Monthly Treasury Statements." Kim pointed out, "In contrast, in Korea, the amount of borrowings can only be confirmed retrospectively through the previous year's annual report the following year. We need to explicitly disclose this information immediately, like the U.S."

Governor Lee responded, "I think it is a desirable direction to make fiscal borrowing amounts transparent."

However, he added, "To make it effective, it is very difficult to define what it means for temporary borrowing not to become a structural trend, whether it refers to average balances, etc. According to the National Assembly's resolution, up to 50 trillion won can be used as needed, and management is conducted within that limit."

Bank of Korea: "It Is Common Not to Include Employment Stability in Monetary Policy Goals"

During the audit, there was also a suggestion that the Bank of Korea's monetary policy goals should include employment stability in addition to price stability. However, Governor Lee stated, "Globally, it is common not to include it."

Article 1 of the current Bank of Korea Act defines the Bank's establishment purpose and policy goal as 'price stability' and specifies that financial stability should be considered when conducting monetary and credit policies.

Ryu Seong-geol, a member of the People Power Party, has proposed an amendment to add employment stability to the Bank of Korea's monetary policy goals alongside price stability. Ryu explained, "The amendment aims to include employment stability in the Bank's objectives, like other countries, meaning the Bank should not only focus on price stability but also on employment stability."

Governor Lee responded, "When we discuss this, we need to consider what advantages there are in diluting the goal of price stability to pursue employment stability. There is much debate." He added, "Globally, it is common not to include employment stability in central bank objectives. Except for the U.S. Federal Reserve, no central bank indirectly includes economic conditions. Generally, financial stability and price stability are the goals."

Copyright Issue Brings 'Sipwon Bread' to the Audit... Claims of "Intangible Added Value"

During the National Assembly audit, the issue of copyright infringement related to currency design arose, with the famous Gyeongju tourist item 'Sipwon Bread' being mentioned. Park Dae-chul, a member of the People Power Party, held up Sipwon Bread and asked, "The manufacturer of Sipwon Bread was sanctioned for using the currency design on the grounds of commercial use inside the currency. Is there no willingness to resolve this magnanimously?"

The Bank of Korea stated that "commercial use of currency designs is not allowed" and requested the manufacturer to cease usage. Park criticized, "I think this is a model of desk-bound administration," and added, "Applying regulations too strictly to a matter that could be laughed off might become a policy mistake that goes against people's livelihoods."

He said, "Although it is said that using currency designs must follow the 'Currency Design Usage Standards,' since these are internal standards, the Bank of Korea could separately permit usage. The design reflects our cultural heritage and regional characteristics well and stimulates consumption by evoking memories, thus creating intangible added value, which should rather be encouraged." Governor Lee responded, "I will consider whether the regulations can be applied flexibly."

[Image source=Yonhap News]