[Q&A] Eun Seong-su, Financial Services Commission Chairman: "Corporate Funding Crisis Rumors Are Not True"

Eun Sung-soo, Chairman of the Financial Services Commission / Photo by Moon Ho-nam munonam@

[Asia Economy Reporter Kim Hyo-jin] Eun Sung-soo, Chairman of the Financial Services Commission, stated on the 6th that the 'corporate funding crisis theory' related to the novel coronavirus disease (COVID-19) situation "is not based on facts."

On the same day, Chairman Eun sent an 'open letter' to the media addressing concerns raised by various sectors regarding recent financial market instability caused by COVID-19.

Chairman Eun pointed out, "In the past, whenever the economy faced difficulties, rumors of a funding crisis repeatedly surfaced, but in hindsight, they turned out to be exaggerated."

Below is a recent Q&A on current issues attached by the Financial Services Commission.

▲ Some claim there is a 'corporate funding crisis.' Is this claim based on reality?

= It is difficult to consider this claim as fact-based. In the past, whenever the economy was struggling, rumors of a funding crisis repeatedly appeared, but after the fact, they were found to be exaggerated. While such crisis theories can raise awareness of problems, they can unnecessarily amplify market anxiety and worsen the financial conditions of specific companies mentioned, so a cautious approach is necessary. The government, together with the financial sector, is closely monitoring the flow of funds in the financial sector and corporate funding demands, and will respond promptly if needed.

▲ Despite government measures, market interest rates such as corporate paper (CP) are rising. Is it too late to fix this with half-hearted measures?

= That is not the case. It is true that CP rates have been rising recently, but this was influenced by the March quarter-end effect, and this phenomenon is not unique to Korea. It reflects market uncertainty and was somewhat expected. Also, the CP spread has not widened significantly compared to other countries like the United States. During the past global financial crisis, it rose as high as 379 basis points. Especially since the Bond Market Stabilization Fund began full operation on the 2nd, corporate issuance volumes have been absorbed by the market, showing relatively stable conditions.

▲ The government keeps repeating phrases like "It will improve soon" or "We will provide full support." How do you respond to criticism that the government's understanding of the situation is complacent?

= The government is fully aware of the seriousness and urgency of the situation and accordingly prepared a financial support program worth 100 trillion won plus additional amounts (announced on March 24). Furthermore, the Bank of Korea announced on March 26 an unlimited repurchase agreement (RP) purchase policy and is providing liquidity to the market through actual RP purchases. On the 2nd, it also announced it would consider lending to non-bank financial institutions under Article 80 of the Bank of Korea Act. The government's firm policy is to prevent companies from going bankrupt due to temporary liquidity problems. There will be no restrictions on company size or industry, and necessary funds will be supplied timely through the already prepared financial support programs.

▲ Corporate funding has increased significantly. Does this mean companies are facing chronic and comprehensive funding shortages?

= The increase in corporate funding in the first quarter of this year expanded significantly compared to the first quarter of last year (+46.1 trillion won → +61.7 trillion won). It is difficult to analyze this as companies facing a comprehensive funding shortage. Corporate funding is determined by market supply and demand. While corporate funding demand has increased, banks and other financial institutions have actively supplied funds to meet this demand. Additionally, the quality of corporate funding structures has improved. Looking at the composition of corporate funding, the growth rate of short-term funding such as CP has slowed, while long-term funding such as loans and corporate bonds has increased significantly.

▲ On the first day of the Bond Market Stabilization Fund, purchases of corporate bonds and others failed. Is the fund only calculating numbers and failing to stabilize the market as initially intended?

= The Bond Market Stabilization Fund completed its capital raising and has been in full operation since the 2nd. Since then, corporate issuance volumes have been absorbed by the market. It is desirable for corporate bonds, CP, and others to be absorbed by the market itself, so it is difficult to offer better conditions than the market in terms of interest rates to encourage market-based funding. We will closely monitor market conditions and actively perform necessary roles to supplement market supply and demand.

▲ Are corporate bonds and CPs not included in the Bond Market Stabilization Fund’s purchase targets unsupported? Does this mean companies that are doomed are abandoned early, and only those that can be saved are supported?

= Low credit rating corporate bonds are not included in the Bond Market Stabilization Fund’s purchase targets. The fund supports bond issuance by relatively high credit rating, sound companies to supplement market supply and demand during frictional market freezes. If the Bank of Korea provides loans to non-bank financial companies under Article 80 of the Bank of Korea Act, the burden on the fund is expected to be reduced. If capacity is freed up, including some low credit rating bonds may be considered. However, not being a purchase target of the fund does not mean the company is abandoned or unsupported. Corporate bonds and CPs not included in the fund’s purchase targets will be supported through other policy financial institution programs such as Primary Collateralized Bond Obligations (P-CBO) and rapid underwriting of corporate bonds.

▲ Regarding support for large corporations, the government emphasizes self-help efforts and partial burden. Is this not riding on anti-corporate sentiment?

= The intention is not to exclude support for large corporations. Companies wishing to use the '100 trillion won plus @ Livelihood and Financial Stability Package Program' will receive funding regardless of company size or industry. However, the '100 trillion won plus @' cannot cover all corporate funding demands. Therefore, unlike small business owners and SMEs, large corporations with market access are encouraged primarily to raise funds through their banks and the market. Large corporations can also use government programs, but there is an unavoidable aspect of bearing some costs such as interest rates and guarantee fees. Additionally, if it is difficult to use programs like the Bond Market Stabilization Fund, large corporations can use policy banks on the premise of self-help efforts.

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