Officials of the Korea Exchange celebrated the benchmark Korea Composite Stock Price Index (KOSPI) surpassing the 9,000-point level at its headquarters in the southeastern city of Busan on June 18, according to Yonhap.
Although the financial system remains stable, rising housing prices and leveraged investments amid a stock rally could generate financial imbalances, the central bank warned on Wednesday.
“Despite domestic and external uncertainties, Korea’s financial system is generally considered stable, supported by stronger real‑economy growth, resilient financial institutions, and solid external solvency,” the Bank of Korea (BOK) said in its financial stability report.
“However, heightened volatility in domestic financial and foreign‑exchange markets presents latent sources of instability that merit close monitoring,” the report noted.
The BOK identified rising financial imbalances driven by a resurgence in housing prices in Seoul and other regions, increased leveraged investing, and concerns about the spread of non‑performing loans in vulnerable sectors.
Household loans increased modestly by 3.5% year‑on‑year to KRW 1,993.1 trillion (≈ US$1.3 trillion) in Q1, while monthly growth has accelerated recently due to rising house prices in the greater Seoul area.
“Household credit growth is accelerating again, highlighting elevated credit risks for vulnerable borrowers and for companies in certain industries,” the BOK stated.
The report indicated that strong market volatility in the first half was driven by a weakening Korean won and net outflows of foreign capital.
The Korean won fell to around 1,500 against the U.S. dollar in recent months, up from the 1,400 level in Q1, as foreign investors sold a net US$83.37 billion of domestic assets by June 9.
The BOK warned that rising stock market volatility and potential price corrections are likely as more investors engage in leveraged equity purchases during the recent rally.
Household non‑mortgage loans expanded faster in Q4 of last year and Q1 of this year, leading many to suspect that much of the borrowing was directed toward the stock market.
“Rising market interest rates are expected to curb expectations of asset price gains and risk appetite, thereby helping to reduce the risk of accumulating financial imbalances,” the BOK said.
“Nevertheless, in the short term, financial market volatility and the risk of defaults in vulnerable sectors could increase,” the report cautioned.
Citing rising inflationary pressures and solid economic growth, the central bank has signaled that a rate hike may be forthcoming after maintaining its key rate for an eighth consecutive meeting in May.
Last week, BOK Governor Shin Hyun‑song pledged “proactive efforts to tame inflation” until inflation clearly approaches its target level.
