Borrowings by self-employed Koreans could threaten bank stability

More Koreans are loaning to pay for their living expenses, with the self-employed incurring much higher debt than households in general.

Moody's Investors Service say that while Korea may have a low unemployment rate -- at 3% to 5% over the last few years, it may not provide a cushion against the deterioration in loan performance.

Here's more from Moody's Investors:

Moody's Investors Service says that the Korean household loans have characteristics that make them vulnerable to financial shocks and tail risks arising from the European debt crisis and China's economic slowdown.

"This can lead to a deterioration in loan performance in Korea, in turn exerting pressure on ABS and RMBS transactions," says Marie Lam, a Moody's Vice President and Senior Credit Officer.

Lam was speaking at the release of a new Moody's report titled, "The Evolving Korean Household Debt Market Pressures Securitization Transactions".

According to the report, more Koreans are borrowing to pay for their living expenses and there is an increase in borrowers from the older age group and lower income group.

Korea's low unemployment rate -- which has stayed at 3% to 5% over the last few years -- may not provide a cushion against the deterioration in loan performance because self-employed people, who make up about 23% of the employed population, have in general incurred much higher debt than households in general.

Therefore, although the performance of the loans is good currently, it is an unreliable indicator of future loan performance because of this structural weakness in the portfolio.

The report notes that ABS transactions with unsecured receivables are particularly vulnerable because these transactions are revolving and securitize new receivables and new accounts from time to time.

Secured mortgage loans are less susceptible, as they have accumulated more than 60% in equity, which provides a good cushion against obligor defaults and any decline in property price.

"We believe the performance of the loans could deteriorate rapidly under a stressed scenario. However, our central scenario for Korea is that the economy will grow 3%-4% in 2012 and the banking system will remain stable," adds Lam.