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Household Debt Vulnerability and Directions for Risk Management

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  • Kim, Young Il

Abstract

Korea's households and banks seem relatively sound in terms of their loss-absorbing capacities. However, a number of worrying signs are present. Some of the negative indicators are the rising share of non-bank consumer loans; the large share of real estate out of household assets, borrowing in the form of short-term balloon payment loans, and the credit risk of low-income indebted households. Against this backdrop, a sound and effective risk management system needs to be designed based on a proper assessment of the current situation while differentiating normal from emergency measures and ex ante from ex post measures. - The recent debate over household debt has included some mixed discussions in terms of risks to financial and social stability, micro-level conditions, and macro-level effects. - The credit risk of households with loans from (systemically important) banks appears limited, while the risk of households with non-bank borrowings is relatively high. - The majority of debt can be found in households whose repayment ability is relatively strong in terms of the level of income and (net) asset. - The characteristics of asset and liability composition of household balance sheets have raised concerns about a liquidity mismatch between assets and liabilities and the risk of debt deflation. - The large increase in household credit activity has led to a rise in the number of people in default, suggesting a need for a firm establishment of lending practices of financial institutions based on repayment abilities and an improvement in consumer debt-relief programs. - Major tasks that lie ahead include a moderate degree of debt-deleveraging and mitigation of its downward pressure, stabilizing the loan structure, reconfiguring the consumer debt-relief programs, redefining the role of credit policies from the areas of social safety net, and improving labor market conditions and household income. - Suitable responses should be chosen and implemented for different situations based on objective assessment and understanding on the given situations. - Approaches for risk management should be designed in a way that differentiates between normal and emergency measures and between ex ante and ex post measures. - Attention should be paid to the vulnerability of low-income borrowers though their credit risk may not pose systemic risks to the economy.

Suggested Citation

  • Kim, Young Il, 2015. "Household Debt Vulnerability and Directions for Risk Management," KDI Focus 41, Korea Development Institute (KDI).
    • Handle: RePEc:zbw:kdifoc:v:41:y:2015:p:1-12
    DOI: 10.22740/kdi.focus.e.2015.41
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    References listed on IDEAS

    as
    1. Young Il Kim & Joo Hee Yoo, 2013. "Assessing Korean Households' Credit Risk: Stress Tests with Household Level Data (in Korean)," Economic Analysis (Quarterly), Economic Research Institute, Bank of Korea, vol. 19(2), pages 59-95, June.
    2. Carmen M. Reinhart & Kenneth S. Rogoff, 2014. "This Time is Different: A Panoramic View of Eight Centuries of Financial Crises," Annals of Economics and Finance, Society for AEF, vol. 15(2), pages 215-268, November.
    3. Stephen Cecchetti & Madhusudan Mohanty & Fabrizio Zampolli, 2011. "The real effects of debt," BIS Working Papers 352, Bank for International Settlements.
    4. Reinhart, Carmen & Rogoff, Kenneth, 2009. "This Time It’s Different: Eight Centuries of Financial Folly-Preface," MPRA Paper 17451, University Library of Munich, Germany.
    5. Carmen M. Reinhart & Kenneth S. Rogoff, 2009. "Varieties of Crises and Their Dates," Introductory Chapters, in: This Time Is Different: Eight Centuries of Financial Folly, Princeton University Press.
    6. Reinhart, Carmen & Rogoff, Kenneth, 2009. "This Time It’s Different: Eight Centuries of Financial Folly-Chapter 1," MPRA Paper 17452, University Library of Munich, Germany.
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