Surge in Bank Bond Issuance Despite Loan Regulations

This Month's Issuance Amount Reaches 7.7 Trillion Won, Over 8 Times Increase Compared to Previous Month
Last-Minute Demand for Credit Loans Rises, Impact of Corporate Loan Maturity Extensions
Loan Regulations Strengthened After the 30th May Lead to Potential Decrease in Future Issuance

[Asia Economy Reporter Kangwook Cho] Despite recent tightening measures on credit loans by financial authorities, the issuance of bank bonds in the banking sector is surging. This is interpreted as an increase in 'last-minute' demand from borrowers trying to secure loans before the regulations take effect on the 30th. Additionally, the approaching year-end has led to a tendency to proactively meet liquidity standards, and demand related to New Deal funds also appears to be reflected.

According to the Korea Financial Investment Association and financial sector data on the 20th, the net issuance of bank bonds from the 1st to the 19th of this month amounted to 7.7 trillion won, more than eight times the previous month's 960 billion won. If this increasing trend continues, it is highly likely to surpass the highest figure so far this year, 10.34 trillion won recorded in April.

The net issuance of bank bonds this year up to the 19th of this month is about 47 trillion won (as of the end of September), nearly seven times last year's total of 6.8281 trillion won. This is because banks continue to require funds as they extend loan maturities or increase new loans for companies and small business owners struggling due to the impact of the novel coronavirus disease (COVID-19).

In March and April, corporate loans increased due to the COVID-19 pandemic, leading to a surge in general bank bond issuance. Banks utilized government financial support policies as an important channel, resulting in increased bond issuance. Although demand for general bank bonds shrank after the second quarter, some bank bond issuance expanded again after July to prepare for the domestic banks' liquidity coverage ratio (LCR) regulation tightening and increased credit loan demand. After the tightening of household loan regulations in September, net issuance decreased to 960 billion won in October but has jumped again this month.

This appears to be due to borrowers trying to catch the 'last train.' Financial authorities announced regulations tightening credit loans for high-income earners starting on the 30th of this month. Borrowers who take loans before the 30th are not subject to the debt service ratio (DSR) 40% regulation or credit loan recovery limits. As a result, non-face-to-face credit loans tripled over the weekend, and various loan inquiries have been coming into bank counters. In fact, the credit loan balances of the five major commercial banks?KB Kookmin, Shinhan, Hana, Woori, and NH Nonghyup?rose by more than 1 trillion won just one day after the announcement of the measures.

Given this situation, concerns about the soundness of banks are growing as the proportion of COVID-19 exposure increases. The stock and real estate investment boom, along with phenomena like 'debt investment' and 'all-in' borrowing, have led to signs of a 'liquidity bubble' following fund illiquidity. Excess liquidity flowing into real estate and stock markets has inflated asset market price bubbles. Kim Sang-jo, Chief of the Presidential Policy Office, recently stated, "It is true that in the current situation of excess liquidity, unstable bubble signs are appearing in asset markets, especially in the stock market."

However, as the banking sector plans to strengthen regulations on household credit loans, there is a possibility that bank bond issuance may decrease in the future. Since banks issue bank bonds to secure funds necessary for loans, the strengthening of household debt regulations and a decrease in loan demand could lead to a long-term reduction in bank bond issuance in the banking sector.

Kim Min-jung, a researcher at Hanwha Investment & Securities, said, "With the lowering of the management standards for high DSR loan ratios and the expansion of the application scope to high-income earners' large credit loans, speculative demand in the asset market using excessive leverage will be suppressed," adding, "Gradual and phased strengthening of household debt is expected to reduce the demand for bank bond issuance."

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