South Korea's financial system has remained stable, but a rise in housing prices and high household debt serve as major potential risks to financial stability, a central bank report showed Thursday.

In a biannual report on financial stability, the Bank of Korea (BOK) called for policy efforts to stabilize the housing market and curb the growth of household debt, raising the need to ease the high level of financial imbalances.

"Since the first half of this year, the country's financial system has remained relatively stable, but gains in home prices and the high level of household debt serve as vulnerability to financial stability," the report said.

The BOK said volatility in the country's financial market has recently heightened, but its financial system has largely remained stable amid the economic recovery and an improved capability to repay foreign debt.

The financial stability index, a gauge of overall stability in the financial system, reached 5.1 in November, rebounding from the lowest level of zero in June. But the index still stayed below the warning stage threshold of eight.

The report said growing household debt and rising home prices are latent risks to the financial system as they can hurt financial stability over the medium term.

"Despite efforts to strengthen macroprudential policy, if (an economic) shock occurs at home and abroad, its negative impact on the financial market and the economy could be bigger due to the country's accumulated financial imbalances," it said.

The country's household debt has been repeatedly cited as the main drag on Asia's fourth-largest economy, as households' high indebtedness is feared to curb domestic demand and thus crimp economic growth.

Household credit came to a record high of 1,844.9 trillion won ($1.5 trillion) as of end-September, up 36.7 trillion won from three months earlier, according to central bank data.

South Korea's housing prices have sharply risen in recent years despite the government's measures to cool down the red hot property market. People have taken out loans to buy homes in anticipation of further gains in home prices.

The growth of home prices has slowed since September amid tighter lending rules and the BOK's rate hikes, but the housing market remains unstable due largely to an imbalance of housing supply-demand.

In November, the BOK raised the policy rate by a quarter percentage point to 1 percent to rein in inflation and household debt. The rate hike came three months after the bank made its first pandemic-era rate hike in August.

BOK Gov. Lee Ju-yeol earlier said the current monetary policy stance remains accommodative, hinting at the possibility of further rate increases in the coming months.

Policymakers warned that monetary policy shifts by the US Federal Reserve and other central banks could increase market volatility and raise downside risks for South Korea.

If global financial imbalances accumulated during the pandemic are abruptly adjusted, it could cause a fall in asset prices in South Korea and deleveraging, the BOK report showed.

"Authorities should continue to make policy efforts to gradually ease the high level of the financial imbalance," it said. (Yonhap)