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Bank of Korea warns against steep rise in leveraged lending

Bank of Korea Governor Lee Ju-yeol speaks during an online press conference at its headquarters in Seoul, Friday. Courtesy of Bank of Korea
Bank of Korea Governor Lee Ju-yeol speaks during an online press conference at its headquarters in Seoul, Friday. Courtesy of Bank of Korea

By Lee Min-hyung

The Bank of Korea (BOK) warned Friday against a steep rise in leveraged household lending for stock investments.

BOK Governor Lee Ju-yeol urged investors to refrain from jumping into the nationwide stock investment boom by taking out excessive loans, as the Korea Composite Stock Price Index (KOSPI) has reached a record high "in a very short period of time."

"Investors may have to endure an intolerable level of loss when a (stock) price is adjusted at a time when the stock market index has recently been on the rapid rise," Lee told reporters in an online press conference.

"When the index grows too fast, there stands an ample chance that the stock price can be readjusted due to external unpredictability ― such as any changes in major economies' monetary policies, geopolitical risk factors and possible supply disruptions of COVID-19 vaccines," Lee said.

According to data from the central bank, the balance of household lending by banks reached 988.8 trillion won as of the end of 2020, up by 100.5 trillion won from the previous year. This was the biggest yearly growth since 2004 when the BOK started compiling such data.

The central bank has adopted a monetary easing policy since the outbreak of the coronavirus epidemic last year, cutting the benchmark rate down to a record low of 0.5 percent to expand liquidity and revitalize the economy.

The step was inevitable, with major economies ― such as the U.S. ― taking similar steps. But the super-low interest rate ended up sparking the boom of leveraged investments here, with a growing number of households engaging in buying sprees of major assets ― such as stocks and apartments ― with the borrowed capital.

The central bank's monetary policy board also kept the key interest rate frozen at 0.5 percent Friday amid lingering concerns that any additional rate cut will end up overheating the asset market.

This came a day after U.S. Federal Reserve Chairman Jerome Powell reiterated the Fed's position to maintain the near-zero interest rate for the time being. He said any interest rate hike would come "in no time soon."

Powell also stressed that "now is not the time" to discuss the central bank's aggressive bond-buying campaign.

Economists said this would have a limited impact on major market indices here.

"The Fed will maintain the near-zero interest rate stance until 2022, and no outstanding changes are expected in its monetary policy this year," said Hwang Sei-woon, an economist at the Korea Capital Market Institute.

"Korea's stock and bond market has to pay more attention to the Fed's possible discussion on a bond-taper talk. But the discussion is unlikely to start by the end of this year."

Regardless of the Fed's interest rate policy, the won-dollar exchange rate is expected to fall after U.S. President-elect Joe Biden is inaugurated, as his upcoming administration will push for a stronger set of fiscal expansion policies, according to the economist.


Bank of Korea Governor Lee Ju-yeol speaks during an online press conference at its headquarters in Seoul, Friday. Courtesy of Bank of Korea
Bank of Korea Governor Lee Ju-yeol speaks during an online press conference at its headquarters in Seoul, Friday. Courtesy of Bank of Korea

By Lee Min-hyung

The Bank of Korea (BOK) warned Friday against a steep rise in leveraged household lending for stock investments.

BOK Governor Lee Ju-yeol urged investors to refrain from jumping into the nationwide stock investment boom by taking out excessive loans, as the Korea Composite Stock Price Index (KOSPI) has reached a record high "in a very short period of time."

"Investors may have to endure an intolerable level of loss when a (stock) price is adjusted at a time when the stock market index has recently been on the rapid rise," Lee told reporters in an online press conference.

"When the index grows too fast, there stands an ample chance that the stock price can be readjusted due to external unpredictability ― such as any changes in major economies' monetary policies, geopolitical risk factors and possible supply disruptions of COVID-19 vaccines," Lee said.

According to data from the central bank, the balance of household lending by banks reached 988.8 trillion won as of the end of 2020, up by 100.5 trillion won from the previous year. This was the biggest yearly growth since 2004 when the BOK started compiling such data.

The central bank has adopted a monetary easing policy since the outbreak of the coronavirus epidemic last year, cutting the benchmark rate down to a record low of 0.5 percent to expand liquidity and revitalize the economy.

The step was inevitable, with major economies ― such as the U.S. ― taking similar steps. But the super-low interest rate ended up sparking the boom of leveraged investments here, with a growing number of households engaging in buying sprees of major assets ― such as stocks and apartments ― with the borrowed capital.

The central bank's monetary policy board also kept the key interest rate frozen at 0.5 percent Friday amid lingering concerns that any additional rate cut will end up overheating the asset market.

This came a day after U.S. Federal Reserve Chairman Jerome Powell reiterated the Fed's position to maintain the near-zero interest rate for the time being. He said any interest rate hike would come "in no time soon."

Powell also stressed that "now is not the time" to discuss the central bank's aggressive bond-buying campaign.

Economists said this would have a limited impact on major market indices here.

"The Fed will maintain the near-zero interest rate stance until 2022, and no outstanding changes are expected in its monetary policy this year," said Hwang Sei-woon, an economist at the Korea Capital Market Institute.

"Korea's stock and bond market has to pay more attention to the Fed's possible discussion on a bond-taper talk. But the discussion is unlikely to start by the end of this year."

Regardless of the Fed's interest rate policy, the won-dollar exchange rate is expected to fall after U.S. President-elect Joe Biden is inaugurated, as his upcoming administration will push for a stronger set of fiscal expansion policies, according to the economist.


Lee Min-hyung mhlee@koreatimes.co.kr


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