household leverage metrics & assessment - imf · pdf filehousehold leverage metrics &...

Household Leverage Metrics & Assessment ― The Korean Case

Tae Soo Kang

Financial Stability Office

Bank of Korea

IMF Conference on Operationalizing Systemic Risk Monitoring

Outline

I. Concerns over Household Leverage

II. A Set of Granular Metrics to Assess Sustainability

of Leverage

A. Metrics to Assess Household Debt Servicing Ability

B. Metrics to Assess F.I.‟s Loss-Absorbing Capacity

C. Stress Test

III. Ways Forward

1


High level ⇒ Household leverage at historic peak

Rapid growth ⇒ Up 59% since 2000

Variable rate loans ⇒ More than 90% of household debt

153%

120%

130%

140%

150%

160%

2002 2003 2004 2005 2006 2007 2008 2009

Level1)

122%

Note : 1) Household debt/PDI

Source : Bank of Korea

91%

60%

70%

80%

90%

100%

2002 2004 2006 2008 2009

Variable rate Loans1)

Note : 1) Growth Rate (Debt/PDI) Since 2000 Note : 1) Share of variable rate loans out of

total household loans

59%

20%

30%

40%

50%

60%

70%

2002 2003 2004 2005 2006 2007 2008 2009

Growth Rate1)

2


McKinsey Report(2010)

“Household sectors in Spain, UK, US, Canada, Korea have

a high likelihood of deleveraging in the years ahead”

Assessment of Debt Sustainability ?

More diverse & granular approaches using multiple sector-

specific metrics required

Our approach : Micro Granular Metrics* + Stress Test

* Focused on Metrics of

A. “Household Debt Servicing Ability” and

B. “F.I.’s Loss-absorbing Capacity”

II. A Set of Granular Metrics to Assess Leverage Sustainability

3

A. “Debt Servicing Ability

Metrics” for Households

Debt Holdings by Income Group

DSR by Income Group

Leverage by Borrowers’ Credit Rating

Vulnerability to Income Shock

(Household Capital Gearing Ratio)

DTI Ratio

Demographic Shift

1

2

4

3

5

6

II. A Set of Granular Metrics to Assess Leverage Sustainability

4

B. “Loss-absorbing Capacity

Metrics” for Financial

Institutions

Vintage Delinquency Rate

Delinquency Rate

- Delinquency Roll Rate

NPL Ratio

LTV (Loan to Value) Ratio

Coverage Ratio (Loan Loss Provisioning Ratio)

BIS Ratio

1

2

4

3

5

6

⇒ 4~5th Quantile : 70% of Debt, 75% of Asset

5

4.6

10.1

14.7

22.0

48.6

0

10

20

30

40

50

60

1st 2nd 3rd 4th 5th

(%)

Debt Holding (as of 2008)

4.2

7.8

13.5

22.5

52.0

0

10

20

30

40

50

60

1st 2nd 3rd 4th 5th

(%)

Asset Holding (as of 2008)

Source :「Korea Labor and Income Panel Study」, Korea Labor Institute(2010)

0 50 100

1

2

3

4

5

(million KRW)

Income by Group

A. Household Debt Servicing Ability Metrics

70% 75%

Debt holdings by Income Group 1

16.7

18.6

21.9

0

5

10

15

20

25

1~3rd Average 4th 5th

(%)

DSR (as of 2009.8)

10.0

11.3

15.4

0

4

8

12

16

20

1~3rd Average 4th 5th

(%)

Over-indebted Households1) (as of 2009.8)

6

Note : 1) Share of household with DSR>40% in each quantile

Source : Korea Credit Bureau


DSR by Income Group 2

7


Leverage by Borrowers‟ Credit Rating 3

14

16

18

20

22

58

60

62

64

66

68

2006 2007 2008 2009 4/4

High Credit Rating (LHS)

Middle Credit Rating (RHS)

Low Credit Rating (RHS)

(%) (%)

Source : National Information & Credit Evaluation (NICE)

8



Vulnerability to Income Shock

4

47.6%

42.8%

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2,000

2,200

25%

30%

35%

40%

45%

50%

55%

60%

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

(trillion won)

Household Capital Gearing ratio (=Debt/Fin. Asset)

Financial Asset (RHS) : A

Debt (RHS) : B

B/A (LHS)

9


Debt to Income Ratio* 5

* Annual principal & interest payment for mortgage loan + annual interest payment for other liabilities

Annual income

⇒ A subset of DSR focusing on mortgage lending

- DTI requirement : currently at 40~60%

⇒ The DTI data reviewed by banks in the process of

screening each loan can be useful information, if available

to supervisory authorities

10


Demographic Shift 6

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

0%

5%

10%

15%

20%

25%

30%

35%

40%

199

0

199

2

199

4

1996

199

8

200

0

200

2

200

4

200

6

200

8

201

0

201

2

201

4

201

6

201

8

202

0

202

2

202

4

202

6

202

8

203

0

35~54 (LHS)

45~54 (RHS)

2002

2004

2006

2008

2010

2012

0.0

0.2

0.4

0.6

0.8

1.0

0.0

0.2

0.4

0.6

0.8

1.0

0 +3M +6M +9M +12M +15M +18M

2009

2006

2007

2008

(%) (%)

(Number of months elapsed since initial loan issuance)

11


B. F.I.‟s Loss-absorbing Capacity Metrics

Vintage Delinquency Rate* * Aggregate delinquent loan amounts since initial loan issuance at T till T+3M, 6M,...

Total loan issuance at T

1

0.12%

12

Note : 1) Share of loans turning into arrear status each month out of total household loan outstanding

Source : Korea FSS


Delinquency Roll Rate* * The rate at which delinquent loans in arrears within 3months are "rolling" into the

next bucket (more than 3months in arrear)

2

0.0

0.1

0.2

0.3

0.4

0.0

10.0

20.0

30.0

40.0

50.0

60.0

2006.1 2007.1 2008.1 2009.1

(%) (%)

Delinquency Roll Rate (LHS)

Delinquency Rate (RHS)1)

49.2%

40.8%

0.2%

0.1%

13

Source : Korea FSS


NPL Ratio

3

Household Loan

Household

Mortgage

0.00%

0.20%

0.40%

0.60%

0.80%

1.00%

1.20%

2006.1Q 2007.1Q 2008.1Q 2009.1Q 2010.1Q

0.7%

0.5% 0.5%

0.4%

14

2006 2007 2008 20091)

LTV 49.3 47.5 46.2 46.4

Note : 1) as of 2009.9


Loan To Value Ratio*

* Loan Amount

Collateral Value of the Property

4

* LTV of U.S. Mortgage => 79.4% (2007 average, Federal Housing Finance Agency)

15


Coverage Ratio (Loan Loss Provisioning Ratio)*

* Total loan loss provisioning Non performing loan

5

141.6%

198.6%

50%

100%

150%

200%

250%

2006.3 2007.3 2008.3 2009.3 Source : Korea FSS

228.9%

16


BIS ratio

6

13.2%

10.9%

14.4%

10

12

14

16

2006.3 2007.3 2008.3 2009.3

(%)

Source : Korea FSS

Risk Factors

- Income growth

- Interest rate movement

- House prices

Methodology Results

Bank of Korea

(2010)

Household Default Prob.

Model

<Income Shock>

GDP Growth 1%p↓ => BIS ratio => 0.2%p ↓,

* ’09.12 BIS ratio : 14.4%

FSS ( 2010) DSR Sensitivity Analysis

<Interest rate Shock>

2%p interest rate ↑ => DSR 2.1%p↑(14.1% -> 16.2%)

* Maximum DSR sustainable : 22.4% based on survey

17

C. Assessment : Stress Test

18

III. Ways forward

Considering diverse granular metrics of household debt,

drastic deleveraging is less likely than perceived

However, absolute level of household debt is still very

important concern

With more than 90% of household loans having a variable rate:

⇒ exposed to interest rate risk

Policy responses under way

- LTV : 60%→ 50% (‟09.7)

- DTI : 3 speculation zones in Seoul→ expand toward other metropolitan area

(DTI : 50~60%) (‟09.9)

- Gradual reduction of 「loan to deposit ratio 」to 100% by 2013

19

III. Way forward

The simple comparison of macro aggregate

metrics among countries does not provide an

accurate assessment of risk from leverage

The data gaps among countries make a strong

case for setting up a forum led by IMF or FSB to

search for consistent, comparable and granular

metrics

Corporate Sector Leverage Metrics & Assessment

Policy Response

- Information sharing among banks about clients‟ OTC positions(„08.11)

- Setup of derivative transaction monitoring system by FSS(„09.12) :

detailed information regarding counterparty, contract type, underlying

asset, etc.

- “FX derivative transaction risk management guideline” by FSS(„10.1) :

limit on speculative (over-hedge) transaction(less than 125% of export

amount)

21

Thank you

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