Extension of LCR Regulation Relaxation Gives Banks a Breather

Bank Bond Net Issuance of 30 Trillion KRW Over Three Months Since COVID-19
Declined in June but Surged Again in the Second Half of the Year

[Asia Economy Reporter Jo Gang-wook] Recently, banks that had increased the issuance of bank bonds and negotiable certificates of deposit (CDs) to raise funds are breathing a sigh of relief amid the atmosphere of an extension of the liquidity coverage ratio (LCR) regulation relaxation. This is because concerns have grown that loan demand will continue to increase for the time being due to the resurgence of the novel coronavirus infection (COVID-19), triggering an emergency to secure cash.

According to the Korea Financial Investment Association and the financial sector on the 25th, bank bonds worth more than KRW 114 trillion (special bank bonds KRW 85 trillion, general bank bonds KRW 29 trillion) have been issued from the beginning of this year to the 24th of this month. Among them, the net issuance amount excluding repayments exceeded KRW 32 trillion (special bank bonds KRW 30 trillion, general bank bonds KRW 2 trillion).

In particular, the net issuance amount surged from KRW 550 billion and KRW 463.3 billion in January and February, respectively, to KRW 9.38 trillion in March and KRW 10.34 trillion in April. The reason for the sharp increase in net issuance from March is analyzed to be the significant rise in demand after the Bank of Korea included bank bonds in the unlimited repurchase agreement (RP) purchase targets to supply liquidity to the market amid the full-scale spread of COVID-19. The net issuance scale of bank bonds that banks printed during these three months reached a whopping KRW 30 trillion.

In June, the net issuance amount sharply dropped to negative KRW 900 billion. The issuance amount also decreased to about half compared to the previous month. It is interpreted that banks slowed down issuance as the liquidity in circulation exceeded KRW 3,000 trillion for the first time ever. However, in July, the net issuance amount surged again to KRW 3.49 trillion, and the issuance amount exceeded KRW 16 trillion. Even this month, as repayments increased until the 24th, the net issuance amount was KRW 800 billion, but the issuance amount already surpassed the June level.

Average LCR of 4 Major Banks Drops 8.5%p in Q2... Indicates Reduced Lending Capacity

The renewed surge in bank bond issuance is interpreted as due to concerns that the COVID-19 crisis will not end in the first half of the year but may continue until the end of the year. Until recently, household loans at banks have been explosively increasing, and especially as time deposits shrink and even demand deposits are withdrawn, the banks’ LCR decline trend continues. The financial sector estimates that the overall LCR of all commercial banks has fallen below 100%. In fact, the average LCR of the four major banks?KB Kookmin, Shinhan, Hana, and Woori?was 96.7% in the second quarter, down 8.5 percentage points from 105.2% in the first quarter.

The LCR is the minimum mandatory holding ratio of easily liquidated assets such as government bonds, designed as a regulation to respond when a large amount of money temporarily leaves the bank, such as in a 'bank run' during a financial crisis. The higher the ratio above 100%, the more sound the bank is considered; the lower it is, the more vulnerable it is to crises. A low LCR ratio means that lending capacity has been reduced accordingly.

Extension Possibility Eases Supply-Demand Burden... Differentiated Bond Issuance Strategies Expected by Banks

For this reason, the four major banks increased the issuance of bank bonds and CDs in the second half of the year. It is understood that the total bank bonds issued by them after July reached KRW 4.7 trillion. This corresponds to 43% of the KRW 11.03 trillion issued from January to June. During the same period, CD issuance also reached KRW 1.67 trillion, accounting for 32% of the total issuance amount in the first half (KRW 5.24 trillion). However, as the financial authorities are reportedly leaning toward extending the temporary six-month relaxation of the banks’ LCR regulation, originally set to expire in September, banks have been somewhat relieved. Some expect that if the LCR regulation relaxation is extended, concerns about the supply-demand burden of bank bonds will be partially alleviated, while bond issuance strategies will be differentiated by bank. Hana Bank bonds are understood to have had a net issuance of KRW 2.4 trillion from mid-July to last week, and Woori Bank bonds KRW 700 billion from August to last week.

The problem lies in concerns about bank soundness due to the resurgence of COVID-19. Along with the LCR regulation relaxation, the loan maturity and interest payment deferral for small and medium-sized enterprises and small business owners, originally scheduled only until the end of September, is planned to be extended for another six months until the end of March next year. Since February, the total amount of loan maturity extension support has reached KRW 76 trillion, with more than KRW 51 trillion supported through commercial banks. Although the delinquency rate of commercial banks in June recorded the lowest since 2007, it is largely analyzed that the maturity extension and interest payment deferral measures have masked the actual defaults.

A financial sector official said, "As COVID-19 prolongs, loan demand from vulnerable groups is expected to continue, and if loans rapidly increase, managing the LCR will inevitably become more difficult. While additional regulatory relaxation by financial authorities is necessary for banks to fulfill their role in supplying funds, there is also concern that if such measures end, a tsunami of loan defaults could come."

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