Banks to supply liquidity while minimizing bond issuance

Financial Services Commission (FSC) Chairman Kim Joo-hyun speaks during an annual Financial Day commemoration event held in Seoul's financial district of Yeouido, Tuesday. Yonhap

3 trillion won to be injected to improve liquidity at securities firms

By Anna J. Park

Financial authorities and local banks have agreed to provide liquidity to the country's short-term funding market, aiming to help stabilize the local corporate bond and commercial paper (CP) markets. The short-term funding markets recently witnessed a mounting credit crunch following the default of 205 billion won ($143 million) in asset-backed commercial paper (ABCP) issued by the Gangwon Province-led developer of Legoland Korea earlier this month.

According to the Financial Services Commission (FSC) and the Financial Supervisory Service (FSS) Wednesday, key officials from both financial regulatory agencies met with the vice heads of five major commercial banks, KB Kookmin, Shinhan, Hana, Woori and NH NongHyup, on Wednesday to discuss measures to bring stability to the short-term funding markets.

During the meeting, the financial authorities and the banks once again checked both current market conditions as well as the lenders' internal situations, following last Thursday's decision to delay by six more months the application of a higher liquidity coverage ratio (LCR) required for each bank.

Originally, local lenders were required to increase their LCR ― the proportion of highly liquid assets held by financial companies ― to 92.5 percent by December this year, from the current 85 percent, which was temporarily lowered back in 2020 amid the impact of the COVID-19 pandemic. Following the decision, local banks will be obligated to fulfill the increased LCR of 92.5 percent from July next year.

The main reason for the six-month delay was to resolve market anxieties that had been growing recently over local banks' increased issuance of bank bonds to meet the higher LCR requirement. The increase in bank notes was partially attributed to decreased demand for local corporate bonds and CP.

Along with the delay of the application of the higher LCR requirement for lenders, banks agreed at the meeting to strengthen liquidity supply by purchasing various CP, ABCP and short-term bonds, while vowing to minimize the issuance of bank bonds. The banks also agreed to swiftly respond to financial authorities' request to contribute to a bond market stabilization fund.

“With the six-month delay of the normalization of LCR to the original level, local banks are estimated to have more capabilities to provide liquidity to stabilize local financial markets. The banks also vowed to strengthen efforts to assuage market anxieties,” the FSC said in a statement.

Both the FSC and FSS urged the local lenders to continue their role of buttressing the local financial markets, while the financial authorities vowed to implement close monitoring of the markets.

The FSC also announced Wednesday afternoon that small and medium-sized securities firms will be able to benefit from special liquidity support programs worth three trillion won. The announcement was made after the top financial regulator met with the CFOs of local securities firms earlier in the day.

Korea Development Bank's (KDB) purchase option of 10 trillion won in corporate bonds and CP will also be partially available this week. Two trillion out of the entire size will be injected to support securities firms' CP purchases from Thursday.

The series of liquidity provision measures are part of the government's move to inject 50 trillion won to salvage the local corporate bond and commercial paper markets, following the credit crunch crisis stemming from the Legoland Korea developer's default and bankruptcy earlier this month.