Shin Hyun-song, governor of the Bank of Korea, delivered the warning on Aug. 28 on the sidelines of the annual Jackson Hole Economic Policy Symposium in Wyoming, where U.S. Federal Reserve Chair Kevin Warsh used his keynote to flag inflation risks of his own.
Shin pointed to the Bank of Korea's Financial Vulnerability Index (FVI), a quarterly gauge that distills about 60 variables, from credit and household loans to leverage, liquidity and asset prices. Benchmarked at 100 for the eve of the 1997 Asian financial crisis, the index hit 79.5 during the 2008 global crisis and reached 65 during the rate-hike cycle that followed Russia's invasion of Ukraine.
The index has since eased to 37.6 in the first quarter of 2024 before rebounding sharply.
The FVI has since returned to its long-term average of 46.5, Shin said, and is likely to exceed that level by the time the central bank releases its financial stability report in September. He added that the steepness of the increase was the greater concern.
Shin drew a sharp line between fighting inflation and safeguarding financial stability. Prices can be reined in belatedly by raising rates even at the cost of a downturn, he said, but financial vulnerabilities cannot be managed once they burst, likening the task to popping a balloon with a needle.
He tied the deepening imbalance to double-digit gains in housing prices and rapid growth in household debt, adding that while the M2 money supply sits near its historical average, broader liquidity measures are running high.
Preemptive coordination between the central bank and the government, he said, was no longer a choice but a necessity.
AJP Takeaways
• Bank of Korea Governor Shin Hyun-song warned on Aug. 28 that South Korea's financial vulnerabilities are rising at a steep pace, driven by surging home prices and household debt, and that the window for preemptive policy action is narrowing.
• The Bank of Korea's Financial Vulnerability Index has returned to its long-term average of 46.5 and is likely to surpass it by the September financial stability report; the gauge reached 79.5 during the 2008 global financial crisis.
• Shin urged preemptive coordination between the Bank of Korea and the government, speaking on the sidelines of the Jackson Hole symposium where Fed Chair Kevin Warsh flagged persistent U.S. inflation.
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