By Kim Jae-won
Staff Reporter
Bank loans have grown at a much faster pace than the nation’s gross domestic product (GDP) over the past decade, raising concerns that the economy is exposed to growing credit risks, according to the Bank of Korea (BOK), Monday.
In its report, the central bank said that the outstanding balance of credit extended by local lenders is 3.5 times the size of the GDP which was valued at 1,023.9 trillion won in September last year. GDP is the total value of goods and services produced in the country in a certain year.
This is compared with the 1.7 times greater recorded in September 1999, suggesting that the ratio of bank loans to the GDP has more than doubled over the last 10 years.
The GDP and bank loans represent the size of the economy and the financial sector. Accordingly, a rise in the ratio means that the financial sector has grown faster than the economy. The ratio stood at 0.9 in 1970 when the central bank began compiling related data.
“It is evidence that the has financial industry has developed at a rapid pace over the past decade. That is definitely a good sign,” BOK economist Jeong Hyung-kwon said.
“It is natural that the financial sector expands in tandem with the growth of the economy. But the concern is that the speed is too fast. It is faster than other advanced countries. We need to watch it carefully,” he added.
The ratio was less than 1.5 before the 1997-98 Asian financial crisis, but has risen drastically since 2000. It rose to two in 2000, and was at 2.5 two years later. The ratio jumped to 2.7 times greater in 2004 and to 3.5 in 2008.
Korea saw the ratio increase 55 percent between 1998 and 2006, while the comparable figures for the United States, Australia, and U.K. rose by 15 percent, 37 percent, and 40 percent, respectively.
“The U.S. suffered from an imbalance between the real economy and the financial sector as the bubble of sub-prime mortgage burst,” Jeong said.
“I am not sure Korea’s imbalance is quite as serious as that of the U.S., but we need to be careful.”
The economist said that the rapid growth of bank loans was the result of banks’ competition to enlarge their sizes to become leaders in the local financial industry.
“During the course of the financial restructuring following the currency crisis, lenders focused on getting bigger through aggressive loan extensions,” he said.