Household Over-indebtedness and Financial Vulnerability in Korea: Evidence from Credit Bureau Data

Abstract

Financial soundness in the household sector matters for financial \nstability and for the real economy. The level of household debt in \nKorea raises concern about the financial soundness of the household \nsector due to its size, growth rate and quality. Against this backdrop, \nwe assess the financial vulnerability of borrowers based on an \nanalysis of credit bureau (CB) data, in which the actual credit \nactivities of most individuals are recorded at a high frequency in \nKorea. We construct over-indebtedness indicators from the CB data \nand then assess the predictability of forthcoming defaults. Based on \nthe over-indebtedness indicators, we show how borrowers are \ndistributed in terms of over-indebtedness and how the over-indebted \ndiffer from average borrowers in terms of their characteristics. \nFurthermore, we show how the aggregate credit risk in the household \nsector would change under macroeconomic distress by analyzing how \neach borrower’s credit quality would be affected by adverse shocks. \nThe findings of this paper may contribute to assessing household debt \nvulnerability and to enhancing regulatory and supervisory practices \nfor financial stability.

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