Bank LCR Relaxation Extended Again or Ended... Interest Rate Hike Becomes a Variable

"The Bank of Korea's Monetary Policy Normalization Aligns with LCR Normalization Policy Direction"

[Asia Economy Reporter Park Sun-mi] The liquidity coverage ratio (LCR) relaxation measures in the banking sector, scheduled to end late next month, are at a crossroads for re-extension. Market observers believe that if the maturity extension and interest repayment deferral measures for small business owners, extended due to the resurgence of COVID-19, are further prolonged, the LCR relaxation measures for banks are also likely to be re-extended. However, since the base interest rate hike, aimed at withdrawing excessive liquidity in the market, has taken its first step, there is cautious speculation that normalization may proceed immediately.

According to the financial industry on the 31st, as of the end of the second quarter, the LCR of the four major commercial banks is around 90%. Shinhan is the lowest at 88.97%, followed by Woori (90.05%), KB Kookmin (90.95%), and Hana (91.27%). In 2019, the LCRs of the four major banks were all above 100%, with Shinhan at 106.1%, Woori at 107.2%, KB Kookmin at 105.8%, and Hana at 107.1%.

However, in April last year, financial authorities relaxed the LCR regulatory level from the existing 100% to 85% through the ‘Financial Regulation Flexibility Measures in Response to COVID-19,’ and after two extensions of the relaxation measures, it currently remains around 90%. The LCR is an indicator that measures whether a bank holds sufficient high-quality liquid assets to survive for one month in a crisis situation. If the LCR does not meet the standard, banks must secure additional high-quality liquid assets through issuing bank bonds, among other methods.

The financial market leans toward extending the LCR regulatory relaxation for banks. This is because the maturity extension and interest repayment deferral measures for small business owners, which are set to expire next month, are highly likely to be extended for the third time. The temporary relaxation of the bank LCR was part of the financial regulation flexibility measures in response to COVID-19, with both measures starting simultaneously last year. Additionally, the LCR relaxation allows banks to actively utilize their high-quality liquid assets to expand financial support to the real economy, including small and medium-sized enterprises and small business owners, during the COVID-19 crisis response.

The variable is the Bank of Korea’s base interest rate hike. Last week, the Bank of Korea raised the base rate by 0.25 percentage points, revealing a significantly changed perspective of financial authorities on the economy.

When LCR Normalizes to 100%, Required High-Quality Liquid Assets in Banking Sector Estimated at Around 24 Trillion KRW

Yoon Won-tae, a bond researcher at SK Securities, explained, "The LCR relaxation policy was a liquidity expansion policy with the same purpose as the Bank of Korea’s base rate cut," adding, "It was a monetary easing policy in the same context, saying, ‘Since the Bank of Korea lowered the base rate to expand market liquidity, commercial banks should also release their high-quality liquid assets into the market.’" This means that the Bank of Korea’s monetary policy normalization was interpreted as having the same policy direction as LCR normalization.

If the LCR relaxation measures completely end next month, banks will need to secure high-quality liquid assets, so the financial market is also closely watching the speed of LCR normalization. If bank bonds are issued massively at once to secure high-quality liquid assets, it could burden the bond market.

Researcher Yoon said, "If the bank LCR normalizes to 100% all at once, the required high-quality liquid assets for commercial banks are estimated to be around 24 trillion KRW," adding, "However, if the LCR is raised by 5 percentage points every six months, banks would need to increase high-quality liquid assets by about 10 to 13 trillion KRW (about 2 to 4 trillion KRW per individual bank), so it would not cause a major shock."

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