Rising interest rates will be a major challenge for the South Korean banking industry next year, which may also threaten the country’s financial system at the worst, warned financial experts Monday.
As the new US government under President-elect Donald Trump is raising the probability of the Federal Reserve making rate hikes at a faster pace than expected before, financial risks are mounting here where households and businesses have been relying on leveraging borrowed funds for the past two years amid record low interest rates.
For the US Federal Reserve, it has become more legitimate to make an increase in December considering its judgement on economic conditions and how it has been communicating with the market, the experts said.
“In futures markets, the possibility is almost 100 percent,” said Kim Dong-wan, head of the financial market bureau at Korea Center for International Finance, at a seminar at the Korea Federation of Banks headquarters in central Seoul. The session discussing risks posed at local commercial banks under the incoming Donald Trump administration was attended by 150 financial researchers and analysts.
“The Fed will also raise the rates at least twice next year, but the pace would not be too rapid since the Fed is also unsure about the Trump administration’s fiscal and rate policies,” Kim said.
Rapid rate hikes wouldn’t help Trump’s intention to support American exporters and boost investments, ether, the expert said.
The increasing external pressures on Seoul’s market rates -- despite the Bank of Korea’s wait-and-see stance on its rate decision -- may affect not only financially vulnerable households, but also the property market, according to Kim Wan-joong, a research head at Hana Financial Investment Corp.
“Along with the rate increase pressures, the global economy is expected to remain slow and trade protectionism would spread across the world, which will worsen the sentiment of economic players,” Kim said. “Debt-ridden zombie businesses and marginal households should take measures to enhance risks management.”
The country’s total household debt stood at 1,295 trillion won as of the third quarter of this year, according to the BOK data. The Financial Services Commission has announced it will prepare measures to have financial institutions refrain from raising loan rates and reduce debt burden on vulnerable households.
Even before the US Fed decides its December fund rates, mortgage rates in Seoul have been recently picking up to around 5 percent as bank debentures become more costly.
“The recent rises in mortgage rates reflect heightened volatility in the global financial market and higher premiums for liquidity and credit,” said an official at KFB. “It is not true that banks are intentionally raising spreads for their mortgage rates amid the growing confusion in the market as some claim.”
The spreads are a means for banks to boost their sales, which can be legally adjusted by banks.
“For the next six months, it is highly likely that spreads would spike,” said Son Sang-ho, a researcher at Korea Institute of Finance. “It is worrisome because we are experiencing rate increases amid low growth, which is abnormal.”
Seo Jeong-ho, another researcher at Korea Institute of Finance, said “Low-income households, heavily indebted individuals and households will be financially undermined, which would affect banks’ profitability and the overall financial system in a negative manner.”
Banks need to make efforts to improve their returns on equities and diversify profit structures, while enhancing stress tests that will help filter out vulnerable consumers, Seo said.
Kang Hyung-koo, a director general at Korea Finance Consumer Federation, called for government measures for consumers to better manage their debt risks.
“In order to help consumers reduce financial costs, the government needs to expand the scope of available information, giving them more choices to manage their debt and costs,” Kang said.
By Song Su-hyun (song@heraldcorp.com)
