The Bank of Korea Says "Bank Burden Will Not Be Significant Even If LCR Regulations Normalize"

On the 5th, ahead of the Chuseok holiday, cash transport personnel are conducting the release operation of Chuseok funds to be supplied to commercial banks at the Bank of Korea's Issuance Department in Gangnam-gu, Seoul. Photo by Joint Press Corps

The Bank of Korea announced on the 8th that even if the Liquidity Coverage Ratio (LCR), which was temporarily lowered during the COVID-19 crisis, is normalized, the regulatory compliance burden on banks will not be significant.

On the 8th, the Bank of Korea explained through its Monetary and Credit Policy Report that this analysis was made after reviewing the "Status of Banks' Funding and Operations and Financial Market Impact Following the Gradual Normalization of LCR Regulations."

The LCR is the minimum mandatory holding ratio of highly liquid assets such as government bonds, designed to ensure that banks can withstand severe liquidity deterioration situations on their own. A higher ratio means banks can endure liquidity crises for a longer period.

Financial supervisory authorities temporarily lowered the LCR regulation from 100% to 85% in response to the COVID-19 crisis and plan to gradually normalize it starting from July this year.

Since immediate normalization of the LCR regulation could shock the market, it is planned to be restored to the existing regulatory level of 100% over the next year.

According to the Bank of Korea, as of June this year, most domestic banks' LCRs already exceed the existing regulatory level (100%) to be applied from July next year, although some banks fall short.

The amount of highly liquid assets such as government bonds required to meet the existing regulatory level is approximately 9.4 trillion KRW.

Banks are expanding the issuance of bank bonds and strengthening efforts to attract time deposits to secure funds for purchasing highly liquid assets.

Bank bonds reached a record high issuance of 37 trillion KRW in May and June this year, and accordingly, the spread of bank bonds (AAA, 1-year) over government bonds widened significantly from 40 basis points at the end of April to 54 basis points at the end of June.

The Bank of Korea judged that the regulatory compliance burden for banks regarding the LCR is not significant, given that the normalization of LCR regulations has been anticipated since last year and is being implemented gradually.

Additionally, the recognition of unused collateral securities for settlement margin implemented in February has also substantially alleviated the LCR regulatory compliance burden.

The normalization of LCR regulations is believed to have increased demand for highly liquid assets centered on government bonds while partially affecting the rise in funding costs for the banking sector.

The Bank of Korea explained, "However, if large-scale bank bond issuance continues due to efforts by banks falling short of the regulatory ratio to improve their LCR, it may contribute to the contraction of investment demand for corporate bonds and asset-backed securities, which have recently seen credit risk concerns, or become a factor in widening spreads of these bonds."

It added, "Furthermore, the rise in deposit interest rates and interest rates on bank bonds with maturities of one year or less may exert additional upward pressure on interest rates for variable-rate loans to households and businesses."

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