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[Editorial] Mounting debt problems

Authorities must take proactive measures to defuse ticking household, PF loan bombs

March 29, 2023 - 05:30 By Korea Herald

The banking crisis, sparked by a loss of confidence by depositors and investors, toppled several banks in the US and Switzerland. It is now spreading into the eurozone. Given the tightly interlinked nature of financial systems across the globe, it is too naive to expect that South Korea would be left unscathed.

The failures of Silicon Valley Bank and Signature Bank in the past few weeks sparked turmoil in the global banking sector. After the collapse of Credit Suisse, which was taken over by UBS on March 19, attention is now shifting toward the eurozone.

The cause for concern is the sell-off that hit Deutsche Bank, Germany’s biggest bank, on Friday when its shares plummeted by as much as 15 percent before closing down nearly 9 percent. Germany’s Chancellor Olaf Scholz said there was “no reason to be concerned” about the lender, but investor jitters continued, dragging down shares in other eurozone banks such as Commerzbank and BNP Parisbas.

Investors are reportedly concerned about a jump in Deutsche Bank’s credit-default swap and a higher proportion of Additional-Tier 1 bonds in the lender’s risk-weighted assets. Higher interest rates, which played a role in bringing down SVB, is also a negative factor.

Deutsche Bank’s shares recovered losses Monday. After all, it is a profitable bank and the bulk of its retail deposits are insured. But the latest development offers a reminder of how fast the nervousness about banks can spread across countries.

Against this backdrop, South Korean financial authorities are in no position to be complacent about the domestic situation. Particularly worrisome is the loan exposure of nonbanking financial companies to real estate project financing (PF), which can spark a severe credit crisis if the housing market tanks.

The volume of exposure by nonbanking firms including savings banks, insurance firms and credit card companies reached 115.5 trillion won ($88.9 billion) as of September last year, according to data from the Bank of Korea.

Authorities should pay attention to the trend in which loan delinquency ratios in the nonbanking sector was on the rise. The delinquency ratio in real estate PF loans extended by securities firms rose to 8.2 percent in September last year, compared with 3.7 percent at the end of 2021.

The domestic real estate market is now saddled with a growing number of newly built houses that are yet to find owners. Rising interest rates also make it more burdensome for home buyers to pay up.

If a liquidity problem occurs in the construction sector following a loss of confidence by investors, it will touch off a serious insolvency crisis that would involve the nonbanking sector as well as the broader financial market here.

This is why the BOK recently stressed the need to monitor the insolvency risks linked to real estate PF loans in the nonbanking sector and strengthen financial soundness amid deepening worries about a new financial shock.

The debt problem is not limited to real estate PF loans. The number of debtor rehabilitation requests stood at 9,736 in February this year, up 63.5 percent from a year earlier. During the same period, individual bankruptcies rose 13.9 percent to 3,448. And the number of corporate bankruptcies jumped 75.4 percent to 100.

Experts point out that the sharp rise in debtor rehabilitation requests and bankruptcies as a sign that the debt woes are now close to an explosive level. As of the end of December, the average debt service ratio, or DSR, of household debtors reached 40.6 percent, recording a new high in four years.

Media outlets reported that about 5 out of 100 debt-laden households cannot pay back their debts even if they sell off all their assets, and the ratio of high-risk households exposed to the loans from nonbanking firms surpassed 20 percent.

Given the deepening debt problems at home and the ongoing banking jitters abroad, financial authorities have to step up measures to secure financial soundness and tackle burgeoning household debt in a bid to prevent a broader financial crisis.