Why Are Securities Firms the Top Choice for Non-Bank Loans? CP Up by 695 Billion KRW in a Week... Quantitative Easing Ineffective

COVID-19 Impact Causes Major Overseas Indices to Plunge
CP Issuance Triggered by ELS Margin Calls
Rising CP Supply Leads to Continuous Interest Rate Increases
Bank of Korea's Liquidity Measures Prove Ineffective

[Asia Economy Reporters Minji Lee, Eunmo Koo] As investor sentiment in the short-term financial market sharply contracts, liquidity crises among securities firms are intensifying. In response, Lee Ju-yeol, Governor of the Bank of Korea, has taken emergency measures by announcing plans to consider directly lending funds to securities firms. Experts point out that stabilizing global stock markets and additional government support are necessary for securities firms to ease their financial conditions.

According to the Korea Securities Depository, the total amount of commercial paper (CP) issued by securities firms over the past week (March 30 to April 3) reached 695 billion KRW. By firm, the amounts were: Korea Investment & Securities (265 billion KRW), Shinhan Financial Investment (130 billion KRW), Meritz Securities (105 billion KRW), BNK Investment & Securities (40 billion KRW), Hana Financial Investment (65 billion KRW), Daishin Securities (10 billion KRW), and Hanwha Investment & Securities (20 billion KRW). This marks a significant increase compared to the 57 billion KRW of CP issued by securities firms during a single week at the end of March last year.

The reason securities firms are actively supplying CP is due to margin calls on equity-linked securities (ELS) triggered by the decline of major overseas indices amid the COVID-19 pandemic. The sharp drop in key indices such as the Euro Stoxx 50 and S&P 500, which serve as underlying indices for securities firms, has also drastically reduced early redemption volumes. In the first quarter, Korea Investment & Securities recorded early redemptions of 1.657 trillion KRW, a 34% decrease compared to the previous quarter. Samsung Securities (2.05 trillion KRW), Kiwoom Securities (404 billion KRW), and Mirae Asset Daewoo (2.044 trillion KRW) also saw decreases of 35.2%, 18.2%, and 7.2%, respectively.

As securities firms continue to increase CP supply, interest rates have risen daily without exception. According to the Korea Financial Investment Association, the 91-day CP rate rose by 0.02 percentage points to 2.23% the previous day. This marks 13 consecutive trading days of increases since the Bank of Korea cut the base rate by 50 basis points on March 16. The Bank of Korea’s 'unlimited quantitative easing' measure has proven ineffective.

Concerns are also growing over real estate project financing (PF) asset-backed securities, which are based on project financing loan receivables. Typically, PF asset-backed commercial paper (ABCP) is rolled over every three months, but disruptions have occurred in recent issuances. According to the Korea Securities Depository, PF-ABCP maturing this month totals 9.4748 trillion KRW. Most securities firms, including Mirae Asset Daewoo, Korea Investment & Securities, Meritz Securities, Shinhan Financial Investment, and Hyundai Motor Securities, have either suspended or are reviewing new real estate PF approvals, struggling with rollovers.

Large securities firms that have actively engaged in PF projects face a situation where they must directly purchase unsold ABCP volumes due to large purchase guarantee commitments. A representative from a major securities firm’s PF division explained, "It’s not that investors refuse to buy due to lack of funds, but rather that demand has sharply contracted psychologically. Securities firms are expected to hold onto unsold volumes for the time being." As of the end of last month, the purchase guarantee commitments of securities firms were led by Kiwoom Securities (611 billion KRW), KB Securities (498.8 billion KRW), NH Investment & Securities (483 billion KRW), Mirae Asset Daewoo (328.6 billion KRW), Korea Investment & Securities (311.3 billion KRW), and Meritz Securities (266.6 billion KRW).

Anna Kyung, Senior Researcher at Korea Ratings’ Financial Division 2, noted, "If irrational market conditions exacerbate liquidity crises among securities firms, they will inevitably face severe difficulties. Rollovers that were normally possible become impossible, and as securities firms try to sell their holdings, interest rates will continue to rise for the foreseeable future."

With securities firms facing challenges such as real estate PF credit exposure, approximately 20 trillion KRW in outstanding CP issuance, and negative industry outlooks from credit rating agencies, calls for additional government support are growing. Researcher Lee Sun from Hana Financial Investment said, "If credit tightening prolongs, causing bond sell-offs or a sharp rise in government bond yields, there is a possibility of indirect support for securities firm CP similar to 2008. If support for securities firm CP purchases materializes, it could become a turning point in easing credit tightening."

The Bank of Korea is also moving swiftly. Governor Lee stated the previous day, "If the situation worsens, we may consider lending to non-bank financial institutions under Article 80 of the Bank of Korea Act to stabilize the corporate bond market." Since direct lending by the Bank of Korea is not immediately necessary, this is interpreted as verbal intervention to stabilize the market. A securities firm official said, "While large securities firms clearly have increased funding needs to meet ELS margin calls, the current situation does not yet require direct lending. However, if global market volatility further expands, some securities firms may require direct loans from the Bank of Korea."

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