Safe Conversion Loans Are Not a Losing Business for Banks

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[Asia Economy Reporter Eunju Lee] While the financial sector has strongly expressed concerns about 'moral hazard' regarding the government's New Start Fund operation method, there seems to be little dissatisfaction about the Safe Conversion Loan. Unlike the New Start Fund, which imposes a considerable burden on commercial banks depending on the detailed definition and scale of 'non-performing loans' to be defined by financial authorities, it appears difficult to conclude that the Safe Conversion Loan is a unilateral loss for banks.

According to the financial sector on the 17th, the Korea Housing Finance Corporation and the six major banks (Kookmin, Shinhan, Hana, Woori, Nonghyup, and Industrial Bank of Korea) began providing information about the Safe Conversion Loan through their websites from today. Official applications will be accepted starting from the 15th of next month. Banks are busy preparing in advance for the flood of loan-related inquiries expected to come. They are taking preemptive measures by utilizing AI (artificial intelligence) in various consultation channels. Shinhan Bank has applied AI consultation technology to phone inquiries and SOL chat inquiries related to the Safe Conversion Loan. KB Kookmin Bank is also preparing to support services that allow customers to consult about the Safe Conversion Loan without waiting.

The Safe Conversion Loan is a product that refinances variable or mixed-rate mortgage loans obtained from the first and second financial sectors into long-term, fixed-rate loans from the Korea Housing Finance Corporation. When banks transfer loan receivables to the Housing Finance Corporation, the corporation issues MBS (Mortgage-Backed Securities) based on cash transactions generated from the loan receivables. Subsequently, banks repurchase the MBS.

At this time, the MBS that banks must acquire can positively impact the BIS (Bank for International Settlements) capital adequacy ratio, a representative soundness indicator of banks. This is because the risk weight for MBS issued by the Housing Finance Corporation is calculated as 0% when calculating the BIS ratio. It is the same as the risk weight assigned to cash assets. Therefore, holding MBS can improve the BIS ratio of banks.

Recently, the BIS ratios of major commercial banks slightly declined in the second quarter, but banks can slightly raise their stability indicators by converting and holding loan receivables as MBS from the Korea Housing Finance Corporation. The BIS ratios of major commercial banks such as KB Kookmin, Woori, and Hana decreased compared to the previous quarter. Woori Bank's ratio dropped from 15.8% in the first quarter to 15.1% in the second quarter, Hana Bank decreased by 0.49 percentage points to 16.75%, and Kookmin Bank decreased by 0.3 percentage points to 17.4%.

An industry insider explained, "Major commercial banks have been making efforts such as issuing hybrid capital securities like perpetual bonds as their BIS ratios have recently declined. In this situation, it is difficult for banks to view holding MBS from the Korea Housing Finance Corporation, which is calculated with a 0% risk weight, as a loss."

There is also an analysis that the negative impact of the Safe Conversion Loan on the profitability of major commercial banks is limited. From the banks' perspective, they incur losses when they are required to excessively hold bonds (MBS) with relatively lower yields (interest) than loan receivables due to the Safe Conversion Loan. However, the interest rate for this Safe Conversion Loan is understood to be similar to or slightly higher than the average bank loan interest rate over the past 12 months.

According to Kim Doha, a researcher at Hanwha Investment & Securities, the average mortgage loan interest rates over the past 12 months for the five major commercial banks were 3.69% for grades 1-2, 3.80% for grades 3-4, and 3.89% for grades 5-6. The interest rates for the Safe Conversion Loan are 3.8% per annum (10 years) to 4.0% per annum (30 years). Researcher Kim explained, "Considering the interest rate levels presented in the Safe Conversion Loan, the demand for conversion is expected to be higher in the secondary financial sector than in commercial banks," adding, "The impact on bank performance will be limited."

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