From Next Month, LCR Regulation Normalizes... Increasing Bank Bond Issuance

Last Month's Net Issuance 3.8 Trillion
Corporate Loans Also Increase Funding Sources

[Asia Economy Reporter Song Hwajeong] Last month, the issuance of bank bonds returned to an increasing trend. This is interpreted as banks' growing need for funding due to the normalization of the Liquidity Coverage Ratio (LCR) regulation and an increase in corporate loans.

According to Hyundai Motor Securities on the 13th, net issuance of bank bonds recorded 3.8 trillion KRW last month, turning to an upward trend since April. Weekly net issuance this month is also continuing to increase. The scale of net issuance of bank bonds was 3 trillion KRW and 1 trillion KRW in January and February this year, respectively, but turned to a decline of -6 trillion KRW in March and recorded -3 trillion KRW in April.

Major banks increased their bank bond issuance in May compared to the previous month. KB Kookmin Bank, which had zero net issuance in April, had a net issuance of 300 billion KRW in May. Shinhan Bank recorded a net issuance of 300 billion KRW in May, up from -300 billion KRW the previous month. Hana Bank increased from -600 billion KRW in the previous month to 700 billion KRW in May, and Woori Bank also increased from -100 billion KRW to 600 billion KRW in May.

The increase in bank bond issuance appears to be influenced by the LCR ratio, which will be gradually normalized starting in July. The LCR is the ratio of high-quality liquid assets to the expected net cash outflows over the next 30 days; increasing the LCR ratio reduces lending capacity. Financial authorities have lowered the integrated LCR regulatory ratio for banks to 85% until June as a flexible financial regulation measure in response to COVID-19. This will be gradually normalized in stages: 90% from July to September (a 5 percentage point increase), 92.5% from October to the end of the year, 95% in the first quarter of next year, 97.5% in the second quarter, and 100% thereafter. As of the end of last year, the LCR status of major banks was 92.6% for Kookmin Bank, 89.6% for Shinhan Bank, 89.7% for Hana Bank, and 89.8% for Woori Bank.

An increase in corporate loans is also cited as a factor for the rise in bank bond issuance. According to Korea Investment & Securities, while the issuance market for high-grade corporate bonds is showing signs of recovery, the market for bonds rated A and below remains frozen in demand. Kim Gimyeong, a researcher at Korea Investment & Securities, analyzed, "Some companies are postponing or canceling corporate bond issuance, and these companies tend to use bank loan channels instead," adding, "With a significant increase in corporate loans, there is a strong need for funding to secure loan resources." According to the Bank of Korea, corporate loans reached 1,119.2 trillion KRW at the end of May this year, an increase of 1.31 trillion KRW compared to the end of the previous month. This marks five consecutive months of growth. The increase in May was the second largest since the preliminary statistics began in June 2009. In particular, loans to large corporations increased by 230 billion KRW in May, the largest monthly increase this year. Corporate loans from the five major commercial banks?KB Kookmin, Shinhan, Hana, Woori, and NH Nonghyup?have increased by more than 32 trillion KRW this year. Researcher Kim said, "As large corporations in need of funds flock to banks, bank bond issuance to secure loan resources appears to be increasing."

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