July Bank Bond Net Issuance Hits Year’s Highest... Impact of LCR Ratio Normalization

[Asia Economy Reporters Song Hwajeong and Lee Minwoo] Last month, the monthly issuance of bank bonds recorded the highest level this year. It is interpreted that the phased normalization of the Liquidity Coverage Ratio (LCR) regulations, which began this month, had an impact. Fundraising to meet the regulatory ratio is expected to continue until next year, affecting loan interest rates and others.

◆Last Month's Net Issuance of Bank Bonds Hits Year-to-Date High

According to the Korea Financial Investment Association on the 1st, the net issuance of bank bonds last month amounted to 7.068 trillion KRW. This far exceeds 2.025 trillion KRW in the previous month and 3.704 trillion KRW in May. Net issuance refers to the amount after subtracting redemptions from the total bond issuance volume. A larger net issuance means more active fundraising. Accordingly, the monthly balance of bank bonds is also rebounding. After recording 377.5142 trillion KRW in February, it fell to 367.4492 trillion KRW in April but was recorded at 380.2462 trillion KRW last month. This is the first time this year that the balance has surpassed 380 trillion KRW.

[Image source=Yonhap News]

In particular, bank bond issuance increased even as bank deposits and savings rose during the interest rate hike period. The deposit and savings balances of the five major commercial banks?KB Kookmin, Shinhan, Hana, Woori, and NH Nonghyup?exceeded 745.2118 trillion KRW as of the 26th of last month, up from 690.0366 trillion KRW at the end of last year. This is an increase of more than 13 trillion KRW within two weeks after the Bank of Korea's 'big step' of raising the base rate by 0.5 percentage points at once on the 12th (731.7795 trillion KRW).

It is interpreted that banks increased bank bond issuance because stable mid- to long-term fundraising is necessary due to the phased normalization of LCR ratio regulations starting this month. A representative from a commercial bank said, "Although deposits and savings are popular, customers are increasingly terminating and switching quickly when they find products with slightly higher interest rates, so bank bond issuance is inevitable for mid- to long-term fundraising." He added, "Although the funding interest rate may be somewhat higher than deposits, there is no cost such as deposit insurance fees, so it is judged to be sufficiently competitive."

◆Normalization of LCR Regulations Leads to Increased Bank Bond Issuance

The normalization of LCR regulations is cited as a major factor for the increase in bank bond issuance. The integrated LCR ratio (the ratio of high-liquidity assets to expected net cash outflows over the next 30 days), which was relaxed to respond to COVID-19, began the normalization process last month. The relaxed 85% will be raised to 90% by the end of September, 92.5% by the end of this year, and fully normalized to 100% after July next year. To meet this, major commercial banks have actively raised their LCR ratios this year through bank bond issuance. As of the first half of the year, the average LCR of the four major banks was 96.38%, up nearly 6 percentage points from 90.41% at the end of last year. Shinhan is at 98%, Kookmin at 92.09%, Woori at 96.8%, and Hana at 99.75%, all exceeding the 90% normalization stage by the end of September. Shinhan, Woori, and Hana were in the 89% range at the end of last year. However, Kookmin decreased from 92.55% at the end of last year.

Since banks must meet 100% by July next year, fundraising is expected to continue. Kookmin Bank, for example, must raise its ratio by 0.41 percentage points by the end of this year. According to the Bank of Korea, as of May, the amount of high-liquidity assets required to meet the existing regulatory level (100%) is 25.3 trillion KRW, and the amount required to comply with the applied ratio (92.5%) in the fourth quarter of this year is 3.6 trillion KRW.

Fundraising through bank bond issuance is also expected to affect loan interest rate increases. This is because the interest rates on bank bonds with maturities of one year or less, which have recently increased significantly, are used as reference rates for household and corporate variable-rate loans. Hong Junyu, head of the Financial Market Research Team at the Bank of Korea, said, "The need for banks that fall short of regulatory ratios to improve their LCR in the future may act as additional upward pressure on loan interest rates or as a factor in building relatively inferior bonds or widening spreads."

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