Macroeconomic instability greatly affected the financial crisis in Korea at the end of 1997. The need for macroprudential supervision in Korea was highlighted by the bursting of the credit card bubble in 2003.
During the credit card lending boom, the supervisory authority did not respond adequately to the growth of household delinquencies stemming from the reckless behavior of credit card issuers.
The authority was not sensitive to systemic distress originating from households because its prudential oversight was primarily focused on the soundness of individual financial institutions (Lee, 2006). This case underlined the importance of placing greater emphasis on detecting early warning signs before the build-up of excessive imbalances continued for too long (Kang and Ma, 2009).
After the credit card bubble burst, there was a new, widespread appreciation of macroprudential policy. Mortgage loans had increased sharply since 2000, which undermined the stability of the overall housing market. The supervisory authority has taken steps to prevent overheating in mortgage lending and to minimize the risk of loan default.
First, the supervisory authority raised the risk weighting for mortgage loans. The authority also raised the minimum loan loss reserve ratios for banks’ household and corporate loans that were classified as normal and precautionary in November 2002 and in December 2006.
Second, in 2002, the authority started to reduce the maximum LTV ratio for mortgage loans, from approximately 75 percent to 40 percent in the Seoul metropolitan area.
The authority imposed additional measures, such as a ceiling of 40 percent on the DTI ratio for certain types of borrowers, as well as other restrictions on granting mortgage loans and maturity extensions on existing mortgage loans for properties in the Seoul metropolitan area. These various restrictions on mortgage lending were imposed on both banks and non-banking financial institutions.
Note that Korea's loan terms were conservative by OECD standards even before the tightening. But given how well Korea's economy has survived the downturn, they may be onto something.