5 Major Banks to Issue 6 Trillion KRW in Bank Bonds in Second Half... Relief Extension Signs Bring Relief (Comprehensive)

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 rise for the time being due to the resurgence of COVID-19, triggering an emergency to secure cash.

Bank bonds issued over 114 trillion won this year alone... Net issuance exceeds 32 trillion won

According to the Korea Financial Investment Association and the financial sector as of the 24th of this month, bank bonds have been issued in excess of 114 trillion won (85 trillion won in special bank bonds, 29 trillion won in general bank bonds) since the beginning of this year. Among these, the net issuance amount excluding repayments exceeds 32 trillion won (30 trillion won in special bank bonds, 2 trillion won in general bank bonds).

In particular, net issuance surged from 550 billion won and 463.3 billion won in January and February, respectively, to 9.38 trillion won in March and 10.34 trillion won in April. The reason for 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 targets to supply liquidity to the market amid the full-scale spread of COVID-19, which greatly increased demand. The net issuance scale of bank bonds that banks issued during these three months reached a whopping 30 trillion won.

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

Top 5 banks' average LCR down 10.25 percentage points 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 but may continue until the end of the year. Household loans at banks have been explosively increasing until recently, and especially as time deposits shrink and even demand deposits are withdrawn, the LCR decline trend continues. The financial sector estimates that the overall LCR of all commercial banks has fallen below 100%. In fact, among the top five banks, the average LCR of KB Kookmin, Shinhan, Hana, and Woori banks in Q2 was 96.7%, down 8.5 percentage points from 105.2% in Q1. However, NH Nonghyup Bank's Q2 LCR was 104.53%, down about 12 percentage points from 116.53% in Q1 but still above 100%.

LCR is the minimum mandatory holding ratio of easily liquidated assets such as government bonds, designed as a regulation to respond when large sums of money temporarily leave banks during situations like a financial crisis or a 'bank run.' A ratio of 100% is the standard; the higher the ratio, the more sound the bank, and the lower it is, the more vulnerable to crisis. A low LCR ratio means that lending capacity has been reduced accordingly.

Extension possibility eases supply-demand burden... Differentiated bond issuance expected by bank

For this reason, the top five banks have 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 since July amount to 5.78 trillion won. This corresponds to 34% of the 16.78 trillion won issued from January to June. During the same period, CD issuance also reached 2.09 trillion won, accounting for 23% of the total issuance amount in the first half (8.86 trillion won).

However, recently, financial authorities are reportedly leaning toward extending the temporary six-month relaxation of banks' LCR, originally set to expire in September, which has eased concerns. Some expect that if the LCR regulation relaxation is extended, the supply-demand burden of bank bonds will be partially relieved, and bond issuance strategies will be differentiated by bank. Hana Bank bonds have seen net issuance of 2.4 trillion won from mid-July to last week, and Woori Bank bonds about 700 billion won from August to last week. Nonghyup Bank's Nonghyup Financial Bonds (Nonggeumchae) have been issued at 1.08 trillion won in the second half, with net issuance reaching 980 billion won.

Concerns over 'loan default tsunami' next year due to COVID-19 resurgence

The problem lies in concerns over 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 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 loan maturity extension support amount has reached 76 trillion won, with over 51 trillion won supported through commercial banks. Although the delinquency rate of commercial banks in June recorded the lowest since 2007, it is largely analyzed that the deferral of maturity and interest payments concealed the 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 LCR will inevitably become more difficult. Additional regulatory relaxation by financial authorities is necessary for banks' role in supplying funds, but if such measures end, there is also concern that a loan default tsunami may come."

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