Korean banks’ “ammunition” is running out, making it hard to keep propping up the stock-market bubble’s rise

Due to sustained strong demand for housing mortgage loans (with a considerable portion of the funds used to buy stocks) and investors taking out direct loans to enter the stock market, South Korea’s five largest commercial banks have already used more than 85% of the full-year household lending growth quota in the first half of this year.

Under strict rules set by South Korea’s financial regulators, a bank’s year-over-year increase in household loan balances may not exceed 1.5%. As of now, the combined household loan balances of these five banks have increased by 3.69 trillion won, while the total additional quota allowed for the full year is only 4.33 trillion won.

At least two banks have already exceeded their full-year loan growth targets early. As a result, market participants widely expect that in the second half of the year, South Korea’s financial system could face a severe “lending cliff”—banks will be forced to significantly tighten approval for new loans and prioritize loan repayments in order to meet regulatory requirements.

This means:
1. An important source of liquidity supporting the rise of South Korea’s stock market is rapidly drying up.
2. Funds that rely on mortgage loans and bank financing flowing into the stock market may decline noticeably.
3. If loan tightening continues, in the second half South Korea’s stock market faces higher risk of liquidity contraction and growing valuation pressure.