BOK report: 'Household DB-based assessment of household debt risk'

A 0.25 percentage point rate rise would push delinquency rate up 0.27 percentage points

High-debt households: one member's default could ripple across the family

Customers receive financial consultations at a KB Kookmin Bank branch in central Seoul. [Herald DB]
Customers receive financial consultations at a KB Kookmin Bank branch in central Seoul. [Herald DB]

When interest rates rise, credit risk is likely to spread beyond individual borrowers to all members of a household, a new analysis shows. Households that took on heavy debt to buy homes — and low-income households — are the most vulnerable to interest rate shocks, the research found.

Jang Hoon, a senior researcher at the Bank of Korea's Economic Research Institute monetary research division, and colleagues released the findings Monday in a report titled "Household Debt Risk Assessment Using a Household Database."

The research team expanded the conventional individual-level household debt analysis to the household level, building a monthly panel dataset that tracks the debt, assets, income and expenditure of about 2.06 million households.

Stress tests using the household database showed that a 0.25 percentage point rise in interest rates would push the share of borrowing households with at least one delinquent member — the household delinquency rate — up 0.27 percentage points from the baseline of 3.35 percent.

A breakdown showed that low-income households and those headed by the self-employed or corporate representatives were relatively more sensitive to rate changes. The delinquency rate for the lowest income quintile rose 0.48 percentage points from 5.45 percent, while the second quintile rose 0.40 percentage points from 4.38 percent. Households headed by the self-employed or corporate representatives rose 0.32 percentage points from 4.47 percent.

High-debt home-buying households were particularly vulnerable to rate shocks and showed a greater likelihood of credit risk spreading within the household. The category refers to the top 10 percent of households that saw the largest increase in debt service burden relative to income when purchasing a home.

For these households, a 1 percentage point rate increase raised the probability of delinquency by 0.81 percentage points — a substantial increase, the BOK said, given that the actual delinquency rate among existing homeowner households stood at 2.01 percent at the end of last year.

If one member of a high-debt household falls into delinquency, the probability that another household member will also become delinquent within 12 months is 8.8 percent — 1.9 times the 4.6 percent rate seen among existing homeowner households. The finding suggests that rising rates could cause credit risk to spread beyond individual borrowers to the entire household.

The BOK also found that consumption gradually slows as the debt service ratio rises, and begins to decline once it exceeds 46 percent.

As of last year, 11.1 percent of indebted households had a debt service ratio above 46 percent, meaning more than one in 10 such households face consumption constraints due to their debt repayment burden.

"Attention should be paid to the risk of delinquency from rising interest rates among high-debt home-buying households, the possibility of credit risk spreading among household members, and the heavy debt repayment burden on low-income households," the report said.


kimstar@heraldcorp.com