BoK to Perform Extensive Analysis of Household Liabilities by Next Year

In a report submitted to the National Assembly on June 30, the Bank of Korea pointed out 1.12 million households as those with high-risk debts. In reaching the conclusion, the central bank used the Household Default Risk Index (HDRI) that it developed.

However, the central bank’s analysis had a weakness in that the HDRI was based on Statistics Korea’s Household Financial Welfare Survey conducted no less than 15 months ago. The survey was rather inaccurate by nature, and did not accurately reflect the situation since the second half of 2014, when household debts began to skyrocket. It was pointed out that the HDRI was not enough to look into the current situation, which is sure to be far worse.

Fortunately, though, this problem is expected to be addressed once the household liabilities database is established early next year through a revision of the Framework Act on National Taxes, as the database will contain data on the incomes of borrowers that the National Tax Service and financial institutions have. In addition, the database is automatically updated each quarter, and thus can make up for the Statistics Korea survey that is conducted in March and made public in November. Furthermore, the accumulation of data in the database is expected to show how individual households’ incomes and liabilities change over time, whereas the survey, carried out since 2010, has a short time series. The database has few precedents worldwide. Only a handful of countries, such as the United States and Sweden, are currently running such databases.

The establishment of the database can be initiated early next year on the condition that the revision bill passes the National Assembly before the end of this year. In that case, overall economic policy can be made bolder and finer. At present, the government is saying that household debts would not lead to systemic risks, because the top 40 percent of income earners have 70 percent of the liabilities. However, the current expansionary monetary policy and housing market regulations have to be altered if the analysis result says the other way around.

The Bank of Korea may be perplexed. If a severe problem is evidenced, increasing pressure may be put for tighter monetary policy. At the same time, it is sure to be said that the policy of retrenchment will cause side effects such as the acceleration of low growth. The central bank’s dilemma can be exacerbated, as it has to pursue financial stability and economic stimulus simultaneously, with the only option of a benchmark rate on hand.