A sand castle built with debt, a warning light for household debt and irregular capital expansion. > News

In May, household loans from the financial sector surged by a whopping 9.3 trillion won, recording the largest increase in 1 year and 9 months since August 2024. Although the momentum of home mortgage loans, which led the increase in loans in the past, has somewhat waned, 'other loans', including negative bank accounts and credit loans, surged by 5.3 trillion won, driving the increase in overall debt. This goes beyond the simple need for daily living funds and suggests that aggressive leveraged investments by individuals trying to follow the rise of the stock market have reached a dangerous level. The financial authorities regarded this as a serious emergency and initiated a strict management system to weekly inspect financial companies that were unable to meet loan targets.

As household loan regulations are strengthened, the 'balloon effect' in which loan demand shifts from banks to secondary financial institutions is becoming more evident. While the total Debt Service Ratio (DSR) regulation in the banking sector is 40%, in the secondary financial sector it is allowed up to 50%, so borrowers who are desperate to meet the limit are flocking to insurance companies, savings banks, and women's companies. However, this is only the beginning of a vicious cycle that imposes higher interest rates on borrowers. The repayment ability of vulnerable borrowers has already reached its limit, and with the possibility of a base interest rate increase, warnings are growing that rising delinquency rates and expanding insolvency in secondary financial institutions could become a detonator for the entire financial system.

Looking inside the financial sector, the behavior of securities companies issuing ‘new capital securities’ is very worrisome. When securities companies were hit by leverage regulation limits, they chose an irregular method of inflating capital on their books by issuing new types of capital securities in the form of perpetual bonds instead of capital increase with paid-in capital. As purchases of these risky bonds were restricted across the same industry, they flowed in large numbers to savings banks and capital companies chasing high interest rates. As a result, a structure has been formed in which receiving institutions that handle the deposits of the common people bear the risk of insolvency of securities companies, and this is acting as a potential 'insolvency bomb' reminiscent of the nightmare of the past savings bank crisis.

Financial authorities have begun to control the speed of loan repayment by reducing the credit loan limit for high-income earners and encouraging loan repayment by exempting early repayment fees. However, the prevailing opinion is that it is difficult to fundamentally control household debt amid the volatility of the stock market and uncertainty in the real estate market with these stopgap measures alone. Experts are raising their voices that the purchasers of new capital securities should be limited to institutions with the ability to withstand losses, such as PEFs or VCs, and that depository institutions should be blocked from investing in risky assets. Above all, in order to correct distortions in the financial system, it is time for supervisory authorities to take the lead in practical risk management rather than hiding behind International Financial Reporting Standards (IFRS).