The U.S. Federal Reserve has raised its benchmark interest rate for the first time in over three years and hinted at the possibility of further increases. This prolonged tightening from the U.S., combined with domestic factors such as rising prices and housing costs, is raising concerns about increased funding and refinancing costs for financial companies, as well as heightened repayment burdens for vulnerable borrowers.
According to the Korea Financial Investment Association, the yield on AAA-rated one-year bank bonds reached 3.965% on September 16, marking the highest level of the year. This is the highest rate in nearly two years and ten months, since late November 2023, and represents a 22 basis point increase compared to the end of June. The yield on five-year bank bonds rose by 34 basis points during the same period.
The concerns over U.S. tightening, coupled with rising domestic prices and housing costs in the metropolitan area, as well as the potential for further rate hikes by the Bank of Korea, have contributed to the upward trend in government and financial bond yields. The government and financial authorities assessed during an expanded macroeconomic and financial meeting that the recent rate hike by the Federal Reserve has largely been priced into the market.
The issue is that the possibility of additional rate hikes in the U.S. could prolong the tightening trend. The Federal Reserve's Federal Open Market Committee (FOMC) meeting on September 15-16 resulted in a 0.25 percentage point increase in the target policy rate range to 3.75-4.00%, leaving the door open for further increases this year.
Additional rate hikes in the U.S. could also put pressure on the Bank of Korea's monetary policy. An expanding interest rate gap between the U.S. and South Korea could increase downward pressure on the won, especially as domestic prices and housing costs continue to rise. The median forecast for the conditional benchmark interest rate over the next six months, released by the Bank of Korea last month, was also 0.25 percentage points higher than the current rate at 3.25%.
Rising market interest rates are driving up funding costs for financial companies. When bank bond yields increase, banks must bear higher rates when refinancing maturing bonds or issuing new ones. The five-year bank bond yield is a key indicator for fixed-rate mortgage loans, which could subsequently affect household loan rates.
Non-bank financial institutions, such as credit card and capital companies that do not have deposit-taking functions, are more directly impacted by rising funding rates. The total amount of bonds maturing for eight major credit card companies in the fourth quarter of this year is approximately 6.79 trillion won.
The yield on three-year financial bonds, which indicate the funding conditions for credit card companies, reached 4.589% on September 16, an increase of 1.844 percentage points from a year ago. During the same period, the credit spread between three-year government bonds also widened from 33 basis points to 54 basis points. This means that credit card companies are likely to refinance maturing bonds at higher rates than before.
If the rising funding costs for financial companies are reflected in loan interest rates, the repayment burden for borrowers could increase. According to the Bank of Korea, the interest rate on new household loans at deposit banks was 4.64% in July, up 0.14 percentage points from the previous month. Household loan rates have shown an upward trend for three consecutive months.
The problem is that vulnerable borrowers, who will have to bear the burden of additional rate hikes, are already facing weakened repayment capacities. According to data submitted by the Credit Recovery Commission to Park Seong-hoon, a member of the National Assembly's Political Affairs Committee, the number of confirmed debt adjustments increased by 56.1% over three years, from 121,095 in 2022 to 189,062 last year. In the first half of this year, 97,199 individuals also received debt adjustments.
There are also increasing cases of borrowers seeking living expenses after managing their debts through adjustments. In the second quarter of this year, applications for small loans from diligent debt adjusters reached 14,893, with a total application amount of 47.019 billion won, marking the highest quarterly figure since 2022.
A financial industry official stated, “The impact of rising interest rates is likely to be more pronounced for users of credit cards, capital companies, and savings banks, where the proportion of high-interest loans is relatively high. If additional rate hikes lead to increased delinquencies and debt adjustments, financial companies may face greater burdens in terms of provisioning and maintaining soundness.”
* This article has been translated by AI.
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