Moody’s says Korean banks vulnerable to eurozone debt crisis

A global investment bank cited the central bank’s monetary policy as a key solution to resolving the growing worries over the record-high household debt.

Goldman Sachs predicted that a soft landing of Korea’s household debt will be possible according to the Bank of Korea’s interest rate-setting.

Its optimistic view could be contradictory to the prevailing anxiety in the market that household debt is a ticking time-bomb as outstanding consumer loans approach 900 trillion won ($789 billion).

If the BOK sets the benchmark interest rate in consideration of the debt held by households, a soft landing could be attained, Goldman Sachs economist Kwon Ku-hoon said in a report.

His analysis could be interpreted as emphasizing the need for the central bank to be prudent in raising key rates amid the loan interest burden on households.

Kwon said inflationary pressure has recently eased, downplaying the possibility of the BOK’s rate hikes for the coming months, and forecast that the central bank will leave the benchmark rate untouched this year.

Goldman Sachs also said financial regulators’ policy to curb banks’ consumer loans could be used as an effective measure to resolve concerns.

The Financial Services Commission has pledged to bring snowballing household debt down to the Organization for Economic Cooperation and Development average.

“We plan to stabilize the market gradually with the goal of lowering the debt level to that of OECD countries,” the regulator said in a statement.

Under the regulatory goal, the commercial banking and credit card industries have been subject to tougher oversight in lending to the private sector.

The FSC is cracking down on commercial banks’ risky household lending by instructing them to raise profitability and financial soundness.

Banks have also been urged to stop evaluating branches based on their amount of lending to the household sector.

The FSC is also considering disciplinary action against credit card companies seeking reckless business expansion.

Meanwhile, Moody’s Investors Service said Korean banks will be vulnerable if the eurozone debt crisis worsens.

If the eurozone crisis enters a critical phase, banks in four Asia-Pacific countries ― Korea, Vietnam, New Zealand and Australia ― could be damaged, it said.

Moody’s formerly highlighted several uncertainties in the local banking industry, saying that unfavorable factors could hamper banks’ long-term growth.

Several months ago, the rating agency cited growing consumer loans, M&A issues and foreign currency liquidity as negative factors.

By Kim Yon-se (kys@heraldcorp.com)