The Presidential Committee on Policy Planning established a dedicated organization to prepare measures for managing the total amount of household debt. The goal is to reduce excessive household debt relative to the size of the domestic economy and to create a medium-to-long-term plan to alleviate real estate concentration.
According to the political and financial sectors on the 3rd, the Presidential Committee on Policy Planning established a subcommittee dedicated to the household debt issue under the economic subcommittee last week. A key official from the committee noted, "Household debt is preventing domestic demand from recovering," and that "to restore growth momentum, the household debt ratio must be reduced, which is why we established a subcommittee to address it at the level of national policy tasks." The subcommittee is led by Hong Seong-kook, a former member of the Democratic Party of Korea. Hong is mentioned as a strong candidate for the next head of the Financial Supervisory Service.
The government deems household debt management urgent. A high debt ratio negatively affects economic growth. Household debt in Korea is relatively high compared to the size of the economy. According to the International Institute of Finance (IIF), as of the fourth quarter of last year, Korea's household debt ratio relative to its gross domestic product (GDP) was 91.7%, ranking second among 38 countries worldwide. The government's announcement last month of strict lending regulations, limiting the maximum amount of mortgage loans to 600 million won, reflects this concern.
The subcommittee is currently discussing policy measures to manage household debt. It is reported that while suppressing the supply of real estate loans, they are devising ways to channel funds into advanced strategic industries and small and medium-sized enterprises. Previously, the committee mentioned imposing a "penalty" to increase banks' cost burdens as they handle more mortgage loans in its strategy for "real growth in Korea." It also stated plans to introduce a "small and medium-sized enterprise coexistence finance index" to evaluate the efforts of banks in supporting small and medium-sized enterprises. A committee official said that "specific measures will be announced early next week."
However, resistance from the banking sector is expected. The penalty for requiring banks to accumulate more capital when handling mortgage loans will be a significant burden for them. A banking official stated, "If the tied-up capital increases, it may become difficult to expand value-up policies such as dividends," adding, "If household loans are managed with this type of penalty for accumulating more capital, mortgage loans will likely concentrate even more on high-credit borrowers."