South Korea’s monetary policy chief on Tuesday called for the nation to brace for potential risks stemming from the financial authorities’ decision last year to funnel massive liquidity into the market and extend loan forbearance periods, due to the COVID-19 pandemic.

“We must focus on risk management and accelerating innovation, and debt issues and the excess flow of capital into the asset markets – which are the side effects of the coronavirus crisis – need to be resolved,” Bank of Korea Gov. Lee Ju-yeol said in his New Year’s message.

“Factors that systematically affect low economic growth, including the aging population and the imbalance among industries and working classes are likely to accelerate, along with the transition into a green, digital economy,” he added.

Financial authorities and local banks last year launched several loan forbearance programs and special loan products for businesses hit by COVID-19, which fueled concerns of growing default risks. On top of that, the BOK’s decision to slash the benchmark interest rate to a record-low 0.5 percent in May coupled with the government’s failure to cool down the heated housing market were main reasons for the sharp rise of the nation’s household debt.

In November, the value of outstanding bank loans to local households came to 982.1 trillion won ($905.3 billion), up 13.6 trillion won from the previous month, marking the highest monthly increase yet, according to BOK data released last year. The figure had gained 10.6 trillion won in October.

The increased demand for initial public offering subscriptions was also behind the snowballing household debt as people took out loans to take part in initial public offering schemes. The combined market capitalization of the Kospi’s 916 constituents, including electronics giant Samsung Electronics, exceeded 2,028.3 trillion won, crossing the 2,000 trillion-won mark for the first time Monday.

“When the debt level is high and the gap between the financial and the real economy has widened, the market could be rattled by a small blow,” Lee said.

“We must keep our eyes on the financial system’s weak point and 2021 is likely to be a testing ground for the financial sector’s risk management capability.”

Lee even said that Asia’s fourth-largest economy may need to face a “great reset,” where it would have to overhaul everything to build a better future.

Experts have said that the BOK is likely to maintain its ultralow interest rate throughout this year, focusing on quantitative easing measures to cushion the economy from risks.

The BOK earlier forecast a 3 percent growth for the economy -- rosier than its previous forecast of 2.8 percent -- under the premise that the pandemic would start wrapping up in the second half of the year.

By Jung Min-kyung (mkjung@heraldcorp.com)