[Q&A] Eun Seong-su: "Large Corporations Must Make Self-Restraint Efforts Acceptable to the Public to Receive Support"

Corporate Bonds Maturing by Year-End Total 31 Trillion Won... Sufficient Capacity to Absorb Bonds with This Measure

Eun Sung-soo, Chairman of the Financial Services Commission, is explaining the 'Measures to Stabilize the Financial Market Related to COVID-19' at the Government Seoul Office Joint Briefing Room on the 24th.

[Asia Economy Reporter Kangwook Cho] Eun Sung-soo, Chairman of the Financial Services Commission, said on the 24th, "If we are to support large corporations with (COVID-19 policy funds), there must be self-help efforts that the public can accept."

Chairman Eun emphasized at the government Seoul office while announcing financial market stabilization measures related to the novel coronavirus infection (COVID-19), "They must show a different stance from small and medium-sized enterprises (SMEs)."

The government announced that as the impact of COVID-19 shows signs of spreading to mid-sized and large corporations and key industries, it will inject emergency funds amounting to about 100 trillion won, twice the existing support measures. In particular, it said it would support 29.1 trillion won for SMEs and mid-sized companies and include large corporations if necessary.

Chairman Eun questioned, "If the government accepts all requests, who would try to procure funds in the market with difficulty?" and pointed out, "Self-help efforts will not be required as strictly as usual, but they must be at a level that the public can accept."

Below is a Q&A with Chairman Eun and officials from the Financial Services Commission.

- The support fund has been expanded to twice the level of the 2008 financial crisis. Does this mean the situation is considered that serious?

▲ I will not make a direct judgment. However, in 2008, the crisis in financial institutions spilled over into the real economy, whereas now the problem started in the real economy first. Based on the experience of the foreign exchange crisis, if we respond only to individual corporate situations, the market cannot be stabilized, so we decided to respond with a six-month outlook. We set the policy and support scale with the idea that we must act proactively and boldly to avoid falling behind.

- You mentioned that funds can be supplied to large corporations on the premise of self-help efforts. Are there any conditions for these self-help efforts?

▲ There may be large corporations temporarily lacking liquidity or in special situations. To provide funds to large corporations, self-help efforts that the public can accept are necessary. For example, repaying 10% of the loan and extending the maturity of 90%, or self-help efforts at a different level from SMEs are required.

- For example, the airline industry is one of the hardest-hit sectors. Can it be considered a target for emergency management fund support? If so, how will the support be provided?

▲ The airline industry is in a special situation. Large corporations are also trying hard to raise funds in the market. Large corporations will first come to the commercial paper or corporate bond market, and if that fails, the Korea Development Bank or the Export-Import Bank will step in. However, minimal self-help efforts will be included.

- Regarding concerns that the bond market stabilization fund and securities market stabilization fund contributions place too much burden on banks, what is your view? How will bank soundness regulations be eased?

▲ Banks bear some burden but are also beneficiaries. If the bond stabilization fund absorbs the risk, the burden on banks will decrease. The same applies to the securities stabilization fund. If holding companies' stock prices fall, they also suffer losses. However, if the stock market is jointly supported, they can benefit. From this practical perspective, the financial sector has cooperated.

▲ (Kim Taehyun, Secretary General of the Financial Services Commission) We plan to reduce the risk weight for fund contributions to about half of the current level.

▲ (Lee Sehoon, Director of Financial Policy Bureau, Financial Services Commission) By introducing Basel III, which lowers the risk weight on corporate loans, in July this year, banks will be encouraged to actively provide corporate loans.

- Next month, corporate bond maturities amount to about 6.5 trillion won. How are you preparing for corporate support or restructuring?

▲ Liquidity difficulties can be managed with the support system established this time. Even if this is insufficient, we are considering the issue together. It is estimated that about 31 trillion won in maturities will come due by the end of this year. Among the 31 trillion won, ultra-high-grade triple-A corporate bonds are expected to be absorbed by the market. Therefore, with the 30.8 trillion won support (20 trillion won from the bond market stabilization fund, 6.7 trillion won from P-CBO, 2.2 trillion won for rapid corporate bond underwriting, and 1.9 trillion won for Korea Development Bank corporate bond refinancing support), we expect to have capacity even after absorbing corporate bonds maturing by the end of the year. Since ultra-high-grade corporate bonds are excluded, the remaining capacity will be used to purchase commercial paper.

- When will the second capital call for the securities market stabilization fund take place? If the stock market worsens and the entire 10 trillion won is exhausted, are there other measures?

▲ We cannot assume the second call in advance. It is better to leave the timing and method to market experts rather than the Financial Services Commission making specific statements. It is premature to talk about whether additional funds will be raised after the fund is exhausted.

- How do you assess the current capital soundness level of banks and securities firms? Is there a risk that this situation will spread as credit risk to the financial sector?

▲ (Director Lee) Generally, the capital soundness of financial companies appears very lagging. Market shocks come first, then corporate insolvencies, and only afterward do financial companies feel the impact, so current indicators do not yet reflect this. However, if this situation continues for a long time, it will certainly affect financial companies. For this reason, we announced large-scale market stabilization measures in advance.

- You mentioned that funds can be supplied to large corporations on the premise of self-help efforts. Are there any conditions for these self-help efforts?

▲ There may be large corporations temporarily lacking liquidity or in special situations. To provide funds to large corporations, self-help efforts that the public can accept are necessary. For example, repaying 10% of the loan and extending the maturity of 90%, or self-help efforts at a different level from SMEs are required.

- The airline industry is one of the hardest-hit sectors. Can it be considered a target for emergency management fund support? If so, how will the support be provided?

▲ The airline industry is in a special situation. Large corporations are also trying hard to raise funds in the market. Large corporations will first come to the commercial paper or corporate bond market, and if that fails, the Korea Development Bank or the Export-Import Bank will step in. However, minimal self-help efforts will be included.

- Are self-help plans required for Primary Collateralized Bond Obligations (P-CBO) as well?

▲ (Secretary General Kim) To issue P-CBOs, guarantees from guarantee institutions are required, and there must be bond banks that underwrite the remaining bonds. Also, based on past cases, securities firms must contribute funds to absorb bonds, so unless there are self-help efforts at a level that they can understand and agree to, those corporate bonds cannot be included in P-CBOs. Corporate self-help efforts must be at a level acceptable to bond banks or guarantee institutions.

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