[Q&A] Bank of Korea: "Debt Restructuring for Self-Employed Is Also Positive for Financial Stability"

On the 25th, the Bank of Korea commented on the Lee Jaemyung administration's bad bank policy, which involves writing off long-term delinquent loans of individuals and self-employed people, stating, "It will help reduce the overall debt ratio."

Lee Jongryul, Deputy Governor of the Bank of Korea, made this statement during a briefing on the Financial Stability Report for the first half of 2025, saying, "If you look at the supplementary budget, measures such as the Livelihood Recovery Grant and policies to support the recovery of small business owners are being considered."

Deputy Governor Lee said, "The Livelihood Recovery Grant is expected to help restore income for self-employed people in general, and support for small business owners' recovery, including the write-off of long-term delinquent loans and other debt restructuring measures, is likely to reduce the overall debt ratio." He added, "There are concerns about moral hazard and fairness for diligent borrowers, and I understand the government is carefully considering selection criteria and the extent of debt relief."

Regarding Korea's financial system, Deputy Governor Lee assessed, "Although volatility in the financial and foreign exchange markets has increased due to high domestic and external uncertainty, the system remains generally stable." However, he also noted, "With the domestic economy slowing, risks are increasing among vulnerable household borrowers, the corporate sector, and non-bank financial institutions. The potential for financial imbalances due to the sharp rise in housing prices in some areas of the Seoul metropolitan area remains a latent risk to our financial system, which warrants close attention."

He added, "We will continue to coordinate monetary and macroprudential policies to prevent the renewed accumulation of financial imbalances."

The following is a Q&A with Deputy Governor Lee Jongryul, Director Jang Jeongsu of the Financial Stability Bureau, and others.

On the morning of the 25th, Lee Jongryul, Deputy Governor of the Bank of Korea, and other officials explained the Financial Stability Report at the Bank of Korea in Jung-gu, Seoul. (From left) Lee Jonghan, Head of Financial Institution Analysis Department; Lim Kwanggyu, Head of Financial Stability Planning Department; Lee Jongryul, Deputy Governor; Jang Jeongsu, Director of Financial Stability Bureau; Moon Yongpil, Head of Stability Analysis Team; Go Kyungcheol, Head of Electronic Finance Team. Provided by the Bank of Korea.

- The delinquency rate for loans to vulnerable self-employed people exceeded 12% in the first quarter of this year. When was the last time it was this high?

▲Since 2012, the long-term average has been 8.35%, and the previous peak was 13.54% in the second quarter of 2013. For reference, the overall delinquency rate for self-employed loans is currently 1.88%, with the previous peak at 2.05% in the first quarter of 2015. For non-bank self-employed loans, the current delinquency rate is 3.92%, and the previous peak was 4.60% in the third quarter of 2015.

- With the delinquency rate for vulnerable self-employed people rising, what impact do you expect the bad bank initiative, including debt relief for small business owners, to have on financial stability? Are there any side effects?

▲The supplementary budget includes consideration of the Livelihood Recovery Grant and the establishment of a bad bank to support the recovery of small business owners. The Livelihood Recovery Grant is expected to help restore income for self-employed people in general, and support for small business owners' recovery, including the write-off of long-term delinquent loans and other debt restructuring measures, is likely to reduce the overall debt ratio. In addition, support for business closures is also expected to aid in recovery.

▲As for side effects, concerns have been raised about moral hazard and fairness for diligent borrowers. For this reason, I understand the government is carefully considering selection criteria and the extent of debt relief. Another issue is funding; we have examined the potential impact on interest rates if government bonds are issued, and we believe the impact will not be significant. Therefore, I think these side effects can be addressed going forward.

- Do you believe that recent housing prices in the Seoul metropolitan area are excessively high? The report suggests including DSR in policy loans and ensuring stable housing supply as alternatives. Recently, the National Planning Committee expressed that it would prefer not to introduce new metropolitan new town policies to control real estate. What is the Bank of Korea's recommendation?

▲The rate of increase in Seoul real estate prices is rebounding rapidly. Because the pace is so fast, we are watching the situation very closely and with great caution. Regarding housing supply, my understanding is that the National Planning Committee's intention is not to stop supply altogether, but rather to prepare a roadmap under a long-term plan. Real estate prices are the result of supply and demand, expectations, financial conditions, real estate policies, and macroprudential policies all interacting, so supply is essential from a long-term perspective.

▲The primary driver of the recent rise in real estate prices is likely expectations. Stabilizing expectations is important, and to achieve this, it is necessary to instill confidence that housing will be supplied stably and to maintain consistent macro policies. The Bank of Korea also considers financial stability, including household debt, when setting interest rate policy, in addition to growth and inflation. Given the current situation, I believe we have no choice but to place greater emphasis on financial stability.

- What does it mean to include DSR in policy loans?

▲Policy loans have a significant impact on the housing market and household debt, as they strongly support housing demand and loan guarantees. The proportion of policy loans among housing loans has steadily increased to 28%, so this needs to be addressed. Currently, DSR is not applied to policy loans, so the intention is to address this gap.

- Is including DSR in policy loans more effective than applying DSR to general jeonse loans or strengthening financial regulations on ultra-high-priced housing?

▲It is difficult to say which is more effective or should take priority. However, the basic purpose of policy finance is to ensure housing stability for vulnerable groups and genuine end-users, so this must naturally be taken into account. Therefore, the report recommends that including policy finance in DSR should be done gradually.

- The housing market risk index was 0.90 in the first quarter of this year. What is your outlook going forward?

▲In the second quarter, apartment prices in Seoul rose sharply compared to the national average, and given that household debt has also increased recently, there is a high possibility that the risk index will rise further. Concerns about an overheated housing market could intensify, especially in Seoul. However, if we consider the peak during the COVID-19 period, when liquidity was abundant, the current level has not reached that high, but the upward trend continues.

- Interest rate policy seems to be in a dilemma. From the perspective of financial stability for vulnerable self-employed people, lower rates are needed, but there are also concerns about market overheating. Which aspect is more important in the current situation?

▲The lower the interest rate, the greater the impact on household loans and housing prices due to rates. The Bank of Korea has cut the base rate four times since October last year, and under this rate-cutting trend, we will inevitably have to give more consideration to these aspects. Therefore, cooperation with macroprudential policy will become more important for household debt.

▲Considering economic and inflation conditions, there is a clear positive effect in reducing borrowers' principal and interest repayment burdens. However, unlike previous rate-cutting cycles, this time we have not seen a clear improvement. We found that improvement in delinquency rates is not driven by interest rates alone, but also by income. This means that fiscal policy, in addition to monetary policy, will need to work together to address these issues.

- The household credit-to-GDP ratio fell to the 80% range last year. Is there a chance it could rise back to 90%?

▲As of the end of last year, the household debt ratio was 89.9%. It has declined for three consecutive years. The figure for the first quarter of this year will be released in early July, but our preliminary estimate suggests it may fall slightly compared to last year-end. However, since household loans increased significantly from April to June in the second quarter, there is a possibility of a rebound even without considering GDP conditions. Still, when the Bank of Korea says it aims to stabilize the household debt ratio, it means maintaining a downward trend over time, not reacting to quarterly fluctuations.

- You mentioned rising delinquency rates and concerns about the soundness of non-banks. If deposit insurance coverage is raised in September, do you expect greater financial stability risks? Do you believe the Bank of Korea's supervisory authority over non-banks should be strengthened?

▲Since non-bank institutions offer higher rates than banks, there is a possibility of fund movement, but the gap in deposit rates has narrowed significantly compared to the past. Because of delinquency, non-banks are less aggressive in attracting deposits to manage asset quality, and even after the deposit insurance coverage is raised in September, the likelihood of a sudden shift of funds seems low. However, over time, if the asset size of non-banks shrinks significantly, there may be incentives to expand assets or invest in higher-risk assets to maintain profitability. We will discuss ways to comprehensively monitor these developments.

▲Regarding the Bank of Korea's supervisory authority, I believe data availability is extremely important. After the Legoland incident and the Saemaeul Geumgo crisis, we have seen that non-banks have grown in importance in the financial market and that bankruptcies can unfold very quickly. However, the Bank of Korea's liquidity provision has focused on banks, so we have repeatedly said it should be expanded to non-banks. Currently, we are sharing information with the financial supervisory authorities, but I believe further expansion in this area is necessary.

- What aspects of stablecoins are you focusing on from a financial stability perspective?

▲From a financial stability perspective, if stablecoins are issued, they will need to be backed by reserve assets. Although Korea has not yet established a legal framework, in other countries, reserve assets are composed of highly liquid assets, cash deposits, and short-term government bonds to prepare for redemptions. In the event of a shock to the financial market, a coin run could occur, and the sale of reserve assets or fire sales (selling at reduced prices) would be closely linked to the financial market. If stablecoins are issued by private companies, there is a risk of contagion and amplified instability in the financial system. That is why, in discussions with the government, we have consistently emphasized the need to establish safeguards, considering the Bank of Korea's monetary policy and financial stability perspectives.