20 Trillion Won Only for the Chaean Fund... Preventing Corporate Liquidity Crisis

President Moon Jae-in is presiding over the 2nd Emergency Economic Meeting related to COVID-19 at the Blue House on the 24th. (Yonhap News)

[Asia Economy Reporter Kim Hyo-jin] The government has decided to expand the scale of financial support to 100 trillion won in response to the economic crisis caused by COVID-19. Large corporations have also been included in the support targets.

Until now, the government had maintained a cautious stance on supporting large corporations, but the global economy has been collapsing moment by moment due to the COVID-19 pandemic, leading to a dramatic change in its position.

At the second emergency economic meeting held at the Blue House on the 24th, President Moon Jae-in said, "No normal company will ever close due to temporary liquidity shortages," adding, "If necessary, large corporations will also be included in the support targets."

Earlier, the Financial Services Commission announced a 27 trillion won support plan for the securities, bond, and short-term money markets as a stabilization measure for the financial market, where uncertainty has been maximized. However, the scale was significantly increased during the final coordination process.

The size of the Bond Market Stabilization Fund (Bond Fund) was increased from 10 trillion won to 20 trillion won, and an additional 10 trillion won was injected separately to stabilize the short-term money market, expanding the market stabilization funds to over 50 trillion won.

◆ Will it bring warmth to the tightened companies? = The Bond Fund to be established by the government aims to alleviate market anxiety by providing liquidity support to companies suffering from funding difficulties due to bond market tightening. During the 2008 financial crisis, a 10 trillion won Bond Fund was created, and 5 trillion won was injected through a capital call method whenever necessary.

The market is initially reacting positively. There is an expectation that the Bond Fund can act as a breakwater to ease companies' financial strain and suppress further stock price declines.

Kim Min-jung, a researcher at Hanwha Investment & Securities, said, "During the 2008 financial crisis, the Bond Market Stabilization Fund contributed to restoring investor sentiment and stabilizing the market by purchasing credit bonds on behalf of the market," adding, "If liquidity is supplied to companies through active market stabilization policies this time as well, some concerns about extreme credit tightening may be alleviated."

The 10.7 trillion won Securities Market Stabilization Fund (Securities Fund) focuses on boosting stock prices, unlike the six-month ban on short selling imposed by financial authorities on the 16th, which emphasized market stabilization. Like the Bond Fund, the Securities Fund, created by financial companies, is considered experimental as it was not used even during the 2008 financial crisis.

Plans include financial holding companies taking the lead in raising funds with support from major securities firms. The Securities Fund has a structure similar to the "Stock Market Stabilization Fund" created in 1990 with a scale of 4 trillion won to boost stock prices.

Scale is also important, but there is a burden of bearing the risk of investment losses due to further stock price declines. Therefore, financial companies may hesitate, and the scale may fall short of expectations. Due to explosive net selling by foreigners and increased stock market volatility, funds may be depleted early.

◆ Can the banking sector properly support? = The key to the effectiveness of these measures is the active cooperation of the financial sector, especially banks. In this context, Financial Services Commission Chairman Eun Sung-soo met again with the heads of major banks after three days to hold a signing ceremony promising cooperation in establishing the Bond Fund and Securities Fund.

The banking sector is on high alert for a possible sharp increase in loan delinquency rates due to simultaneous real and financial downturns. The unprecedented zero interest rate era has also triggered emergency signals for profitability management, adding to the burden.

Major banks, through practical consultations with the Financial Services Commission, will provide 3.5 trillion won in secondary interest subsidy loans at ultra-low interest rates (1.5%) to small business owners starting early next month. The banking sector must also lead the extension of loan maturities and interest payment deferrals across the entire financial sector for small business owners.

The financial authorities have consistently presented inducements to banks, stating that they will not hold them accountable for soundness management related responsibilities in the future unless there is gross negligence regarding loans supporting COVID-19 damage.

Additionally, the financial authorities plan to advance the introduction of the Basel III final rules from the originally planned 2022 to this year to increase funding for companies affected by COVID-19. This includes lowering the risk weight for loans to small and medium-sized enterprises without credit ratings from 100% to 85%, and reducing the loss given default (LGD) for unsecured loans and real estate-secured loans among corporate loans from 45% to 40% and 35% to 20%, respectively.

This will reduce the capital burden on banks for SME loans and may also have the effect of increasing the Bank for International Settlements (BIS) ratio.

A financial sector official said, "The recent measures, including this support plan, ultimately encourage banks to fully open the floodgates."

This content was produced with the assistance of AI translation services.