42 Trillion Support Plan Raises Financial Market Expectations... "Alleviating Concerns Over Credit Squeeze" (Comprehensive)

Banks and Financial Sector Face Increased Burden Criticism
Eun Seong-su: "Financial Sector Is Both Burdened and Beneficiary"

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] On the 24th, the government decided to inject more than 100 trillion won into the market to respond to the economic crisis caused by the novel coronavirus infection (COVID-19).

In particular, it plans to counter financial market instability factors such as the stock market, corporate bond market, and short-term funding market with a total of 41.8 trillion won in funds and capital, including a 20 trillion won-scale Bond Market Stabilization Fund (BMSF), drawing attention to its effectiveness.

◆ Will it bring warmth to the frozen companies? = The government had previously considered operating a BMSF of at least 10 trillion won, but the plan announced on this day increased the scale significantly to 20 trillion won during the formulation process.

The BMSF aims to alleviate market instability by providing liquidity to companies facing funding difficulties due to bond market freezes. During the 2008 financial crisis, a 10 trillion won BMSF 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 BMSF will act as a breakwater to ease corporate liquidity and suppress further stock price declines.

With an additional 4.1 trillion won support for smooth corporate bond issuance and the implementation of a rapid corporate bond underwriting system worth up to 2.2 trillion won targeting mid-sized and large companies struggling with bond conversion, the effect is expected to be significant.

Kim Min-jung, a researcher at Hanwha Investment & Securities, said, "The bond market stabilization fund in 2008 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 freezes may be alleviated."

Separately, the Korea Development Bank will directly purchase 1.9 trillion won worth of corporate bonds, including refinancing issues. The targets are companies rated A or higher, or those downgraded due to COVID-19 but still investment grade or above.

Including the previously planned 6.7 trillion won Primary Collateralized Bond Obligation (P-CBO) program, a total of 10.8 trillion won will be supplied in the corporate bond issuance market.

The 10.7 trillion won-scale Securities Market Stabilization Fund (SMSF) focuses on boosting stock prices, unlike the six-month short-selling ban imposed by financial authorities on the 16th, which emphasized market stabilization. Like the BMSF, the SMSF is a card not used even during the 2008 financial crisis, giving it an experimental character.

Plans include financial holding companies taking the lead in raising funds and large securities firms assisting. The SMSF has a structure similar to the "Stock Market Stabilization Fund" created in 1990 with 4 trillion won to boost stock prices.

Scale is also important, but there is a burden of bearing potential 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 exhausted early.

Provided by the Financial Services Commission

◆ 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 heads of major banks after three days to hold a signing ceremony promising cooperation in raising the BMSF and SMSF.

The banking sector is on high alert for a sharp increase in loan delinquency rates due to simultaneous real and financial downturns. The unprecedented zero interest rate era has also triggered alarms on 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 loan maturity extensions and interest payment deferrals across the entire financial sector for small business owners.

The financial authorities have consistently offered inducements to banks, stating that they will not hold them responsible for soundness management related to loans supporting COVID-19 victims unless there is gross negligence.

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 loss given default (LGD) rates for unsecured loans and real estate-secured loans among corporate loans from 45% to 40% and 35% to 20%, respectively.

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

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

Financial Services Commission Chairman Eun Sung-soo said at a briefing in the afternoon that regarding concerns about the financial sector's burden from the BMSF and SMSF, "The financial sector is both a burden bearer and a beneficiary," adding, "We will strive to minimize the burden."

Eun Sung-soo, Chairman of the Financial Services Commission

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