SEOUL, KOREA - Bank of Korea governor Kim Choong-soo said that it is unlikely Korea's household debt problem to transform into a full-blown crisis.

 

He said this on November 15 in a press conference held at the bank's human resources development center in Incheon and added, "The possibility of the consumer debt overhang to threaten the banks' financial soundness is very low, just like the Subprime mortgage meltdown in the United States and the real estate bubble burst in Japan."

 

"We in Korea have regulations on loan-to-value ratios and debt-to-income ratios in place. On a more fundamental level, households in the top quintile and those in the level just below that have most debts. Even though the debt held by the bottom-quintile households is sizable, it is not high enough to warrant special attention," he added.

 

As for the GDP gap, he commented, "If the economy grows as projected next year, the GDP gap will disappear by the year's end. That, however, doesn't mean the central bank may raise the benchmark rate by the second half of 2014. In Korea's case unlike the case in the United States, monetary authorities don't give out forward guidance by which they take such and such measure if economic indicators reach a certain level," hinting that the Bank of Korea would not link the GDP gap with any of its monetary policy tools. 

 

The GDP gap is the difference between actual GDP and potential GDP. If the gap figure yields a positive number, it is called an inflationary gap and indicates the growth of aggregate demand is outpacing the growth of aggregate supply—possibly creating inflation. if the calculation yields a negative number, it is called a recessionary gap.