South Korea's financial markets have come under the pull of monetary tightening as the U.S. Federal Reserve and other major central banks step up rate increases. Analysts say rising loan rates are widening the interest burden on households and companies, while climbing delinquency rates are heightening the need for financial firms to manage asset quality.
The yield on five-year bank bonds, the benchmark for fixed-rate and hybrid mortgages, reached 4.655% on the 15th, the highest in two years and 10 months since Nov. 1, 2023, when it stood at 4.734%, according to financial industry sources on the 17th. Market rates rose as volatility widened ahead of the Federal Open Market Committee meeting amid higher global oil prices.
Reflecting the rise in bank bond yields, five-year fixed-rate and hybrid mortgage rates at the four largest commercial banks — KB Kookmin, Shinhan, Hana and Woori — stood at 4.95% to 6.91%, up more than 0.23 to 0.35 percentage points at both the low and high ends from 4.72% to 6.56% at the end of last month. Fixed-rate and hybrid mortgages in the 4% range have disappeared at every one of those banks except Shinhan. Over the same period, rates on six-month floating-rate mortgages also rose to 4.29% to 6.00% from 4.20% to 5.89%, up 0.09 to 0.11 percentage points at both ends. NH Nonghyup Bank temporarily removed mortgages in the 7% range by cutting its rates 0.45 percentage points, but rates in the 8% range could emerge if the FOMC raises rates again this year.
The growing share of floating-rate loans just as major economies step up rate increases is another source of concern. Floating-rate loans accounted for 68.1% of new mortgages in July, the highest in 12 years and five months, according to the Bank of Korea. The Financial Services Commission is belatedly pushing to introduce long-term fixed-rate mortgages, but some say the measure will have limited effect because loan rates have already risen.
Managing delinquency rates as rates climb is also becoming urgent. Mortgage loans at domestic banks that were overdue by more than one month more than doubled to 2.2 trillion won at the end of June from 1 trillion won at the end of 2022, according to the Financial Supervisory Service.
Small and midsize companies are under pressure as well. Analysts say firms with medium to low credit ratings or those outside the greater Seoul area are finding it harder to secure funds. Lending to small and midsize companies outside the capital region rose 776.3 billion won from April to June, just 7% of the 10.67 trillion won increase for such firms within the capital region.
The FSS on the same day began reviewing the impact of the FOMC's rate increase on vulnerable borrowers. As liquidity in the market gradually shrinks, the watchdog said it would closely examine securities firms and specialized credit finance companies facing refinancing risk, and would prepare for the possibility of wider losses from rising rates by strengthening asset-liability management at insurers. "We see rates as the most immediate risk factor in financial markets right now," said Lee Se-hoon, senior deputy governor of the FSS, adding that the agency is "watching the resulting increase in the financial burden on the public."
