Alarm bells are set off each time the central bank announces data on household debt. But little action has been taken to curb its growth, and the action that has been taken has had little impact. Nothing else explains why household debt has been snowballing.
The potential threat that soaring debt was posing to the Korean economy was so great that the financial authorities were pressured to take regulatory measures. One of the first steps taken in this regard was to add securities brokerages, insurers, and pension and other funds to a group of lenders to households and put them under their control.
In addition, the data collected on their loans to households made it possible for the financial authorities to measure the amount of debt more accurately. But the downside was that some accused the financial authorities of having attempted to underreport the debt by excluding those financial non-banking institutions from the group of lenders to households for so long.
As a result of the regrouping, household debt outstanding at the end of the first quarter of this year, as measured by the amount of loans and purchases on credit, was revised from the initially announced 801 trillion won to 857 trillion won.
The new figure simply meant a change in accounting, not an increase in actual debt. Yet, it gave a renewed sense of urgency to the administration that wanted to put household debt in check. It prompted the administration to announce a package of “measures designed for the soft landing of household debt” on June 29. One key feature was the exemption of fees charged in changing adjustable rates for mortgages to fixed rates.
Household debt proved unruly again when the central bank made public its data for the second quarter earlier in the week. Despite the financial authorities’ efforts to put its growth under control, the debt increased by as much as 18.9 trillion won in three months to 876.3 trillion won. It appeared to be only a matter of time until it surpassed the 900 trillion won mark.
Who is to blame? All three groups involved ― the lenders, the borrowers and the regulators ― must take a share, but the regulators are singled out for their woefully disappointing performance.
Banks and other financial institutions have fiercely competed to lend money to households because such loans are profitable and very safe, as most of them are secured by collateral. They are warned against their shortsighted business practice, but few of them have paid attention to the warning. Should households default en masse, they will have to hold the bag.
Worse still, they seek to keep profits to themselves and to avoid taking losses by handing them over to society at large. The savings banks that have become insolvent or are nearing insolvency are good examples. Those non-banking lenders, which privatized profits during their heyday, are now socializing losses.
To borrowers, the idea of taking out loans and buy homes is undoubtedly alluring. Banks and others are willing to lend them as much money as they request. Moreover, interest rates are low. And housing prices, which have not risen for a long time, seem destined to go up. But what they should be reminded of is that an overleveraged household is little different from its corporate counterpart that is exposed to the risk of bankruptcy.
The regulators should have tightened the spigot gradually, instead of letting the financial market become awash with liquidity, if it wanted to engineer a soft landing. But they have taken no such action. Nor did they back up their threat against excessive household loans with punitive action, when banks and other lenders were dishing out as much as 18.9 trillion won in three months.
Now they are threatening to take drastic action ― reducing the loan-deposit ratios of commercial banks, whose average stood at 97.1 percent at the end of March, by as much as 10 percentage points. According to their estimate, such a reduction will cut household debt by 100 trillion won. Should they do so, however, there will be no soft landing.
