Has the pace of bank bond issuance slowed down... First negative record in June (Comprehensive)

Net Issuance Turns Negative for the First Time This Year
Demand Deposits Without Investment Destinations
Five Major Banks Total 566.316 Trillion Won
Up 77.8 Trillion Won Compared to Last Year

[Asia Economy Reporter Kangwook Cho] The net issuance amount of bank bonds, which commercial banks issue for long-term funding, fell to a 'negative' level last month. This is the first negative figure this year. In response to financial support measures due to the COVID-19 pandemic, commercial banks have increased the issuance of bank bonds this year to secure funds. However, unable to find suitable investment destinations, the funds held by banks have significantly increased this year, leading to a slowdown in issuance. It is also interpreted that the phenomenon of funds flowing into assets such as real estate and stocks, rather than into sectors experiencing liquidity crises, played a role.

According to the Korea Financial Investment Association and financial authorities on the 6th, a total of KRW 27.8041 trillion in bank bonds was net issued in the first half of this year. The net issuance amounts in January and February were only KRW 550 billion and KRW 463.3 billion, respectively, but surged to KRW 9.38 trillion in March, KRW 10.34 trillion in April, and KRW 9.3708 trillion in May. The sharp increase in net issuance from March is analyzed to be due to the Bank of Korea including bank bonds in the unlimited repurchase agreement (RP) purchase program to supply liquidity to the market, which greatly increased demand. Although it sharply dropped to -KRW 900 billion last month, the total issuance of bank bonds in the first half of this year exceeded KRW 30 trillion compared to the same period last year, which recorded net redemption (net issuance amount of -KRW 2.9016 trillion).

Market observers point out that the fact that the net issuance amount of bank bonds turned negative amid the ongoing COVID-19 situation should be carefully examined. Bank bonds are typically issued by commercial banks to raise long-term funds. The net issuance amount is the amount obtained by subtracting the repayment of existing bank bonds from the issuance of new bank bonds, serving as an indicator to gauge corporate funding conditions. Generally, increasing new bank bond issuance without repaying existing bonds is interpreted as a sign that liquidity supply to the market is needed.

The reason for the sharp decline in net issuance is attributed to the issuance amount in June being about half compared to March, April, and May. In fact, the issuance amount of bank bonds, which was around KRW 9-10 trillion in January and February, surged to KRW 18 trillion in March and exceeded KRW 20 trillion in April and May. However, in June, it decreased to the low KRW 10 trillion range, returning to the level seen earlier this year. The repayment amount due to maturity has steadily remained in the KRW 9-10 trillion range.

Within the financial sector, there is speculation that banks, which hastily sought liquidity in line with the government's financial support policy, are now slowing down. This is due to a significant increase in demand deposits held by banks, as they have been unable to find suitable investment destinations. In fact, as of the end of last month, the demand deposit balance of the five major domestic banks?KB Kookmin, Shinhan, Woori, Hana, and NH Nonghyup?was KRW 566.316 trillion. This is an increase of KRW 77.8 trillion compared to the end of last year, more than double the increase of KRW 27.9 trillion in the second half of last year. Bank demand deposits include funds that can be withdrawn or deposited at any time, such as checking accounts and money market deposit accounts (MMDA).

On the other hand, time deposits and installment savings at major banks have rapidly decreased this year. The balance of time deposits and installment savings at the five major banks was KRW 672.0153 trillion as of the end of June, down KRW 13.7 trillion from the end of December last year.

Meanwhile, liquidity in circulation has surpassed KRW 3,000 trillion for the first time ever. According to the Bank of Korea, as of the end of April, the broad money supply (M2) recorded KRW 3,018.6 trillion. M2 includes cash, demand deposits, and time deposits with less than two years maturity, as well as money market funds (MMF), beneficiary certificates, certificates of deposit (CD), repurchase agreements (RP), financial bonds with less than two years maturity, and money trusts with less than two years maturity?short-term financial products that can be quickly converted into cash. The Bank of Korea explained that the broad money supply increased significantly as companies and households secured large amounts of funds through loans due to the economic downturn caused by the COVID-19 crisis.

The real money gap ratio also jumped significantly, reaching the 8% range in the first quarter. The real money gap ratio refers to the percentage difference between the actual money supply (real M2) at a specific point in time and the long-term equilibrium money supply. If the actual money supply exceeds the long-term equilibrium level, the gap ratio becomes positive. This means that the current money supply in the market is more than 8% above the equilibrium level. The real money gap ratio, which was close to 0% in early 2018, has risen by about 2 percentage points from the 6% range to the 8% range in just the first quarter of this year.

There are concerns that liquidity and idle funds in the market are flowing into stock and real estate investments.

A financial sector official said, "The problem is that financial support aimed at economic stimulus is actually concentrating on seeking investment destinations such as stocks and real estate, rather than sectors experiencing liquidity crises," and added, "Considering these factors, it appears that banks have started to slow down the pace of bank bond issuance."

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