Higher rates, economic slowdown, slump in real estate market pose risks to financial system: BOK report

South Korea's financial system remains relatively stable, but a variety of factors -- higher rates, a delay in economic recovery and an extended slump in the real estate market -- may pose risks to its stability, a central bank report said Wednesday.

According to the report from the Bank of Korea, debt repayment burdens have soared in tandem with rising market rates, and borrowers will face heightened difficulties in repaying debts if economic recovery is delayed further than expected.

A decline in home prices and an increase in soured loans to real estate developments amid higher interest rates could also further hurt financial institutions' soundness, the BOK report said.

Last month, the BOK kept its benchmark rate unchanged at 3.5 percent, the third straight time it froze the rate, and it trimmed this year's growth estimate in the face of an extended slowdown in exports amid easing inflationary pressure.

The BOK had delivered seven consecutive rate hikes since April last year.

Amid rising market rates, heavily-indebted households and financially troubled companies have been facing sharply increased debt repayment burdens.

Household loans extended by banks in South Korea rose for the second straight month in May on increased demand for home-backed loans amid high borrowing costs.

Banks' outstanding household loans came to 1,056.4 trillion won ($815 billion) as of end-May, up 4.2 trillion won from a month earlier.

The May tally marks the second consecutive month of an on-month rise following a 2.3 trillion won gain in April.

The BOK report warned that the financial system could be undermined amid uncertainties over monetary tightening moves in major economies, which will further increase volatility in the financial market.

In that case, companies and financial institutions may face an increase in funding costs as credit risks heighten, the report said.

The central bank said it needs to elevate the monitoring of financial institutions' soundness, induce a soft landing of the real estate market and beef up financial authorities' role in coping with potential financial risks. (Yonhap)