Banks Say Bond Yields Will Rise More When LCR Regulations Normalize... Request Extension

Strengthening LCR Regulations Spurs Bank Bond Issuance and Raises Bond Yields
If Market Stabilization Is Needed, LCR Regulation Normalization Should Be Delayed

[Asia Economy Reporter Sim Nayoung] The five major banks (KB Kookmin, Shinhan, Hana, Woori, and NH Nonghyup) have reportedly requested the Financial Services Commission (FSC) to postpone the normalization of the Liquidity Coverage Ratio (LCR) regulation. The LCR is a liquidity ratio regulation set by the Bank for International Settlements (BIS). It refers to the ratio of high-quality liquid assets to net cash outflows over a 30-day period. During the COVID-19 pandemic, financial authorities lowered the LCR to 85%, but it is scheduled to be normalized to 100% by July next year.

Due to this regulation, banks need to secure funds to purchase high-quality liquid assets, which has recently driven banks to issue more bank bonds, causing bond yields to rise?a concern among banks. According to the financial industry on the 20th, executives in charge of funds from the five major banks held a meeting with officials from the FSC's Industrial Policy Bureau to discuss market stabilization measures. The FSC stated that morning, "We plan to pursue partial easing of liquidity regulations for financial companies, including postponing the normalization of the bank LCR regulation ratio," expressing their stance on future directions.

The most urgent issue for banks currently is expanding the scale of fund procurement. A representative from a commercial bank said, "Whether to meet the LCR ratio required by the FSC or to hedge the volatility of over-the-counter derivative transactions caused by exchange rate increases, we generally need to expand the scale of fund procurement."

There are two ways to expand the scale of fund procurement: offering products such as special high-interest deposits to increase deposits or issuing bank bonds. However, as a result of these measures, bond yields rise, the corporate bond market becomes unstable, and eventually, loan interest rates also increase. Another commercial bank official explained, "Banks are asking the FSC to postpone the normalization of the LCR regulation ratio to break this chain that destabilizes the market right now," adding, "We need to lower bond yields first."

Meanwhile, the 5-year bank bond (unsecured, AAA) yield recorded 5.224% as of the 19th. This is the first time in about 12 years and 10 months since February 24, 2010 (5.24%) that it has risen to the 5.2% range. Short-term bond yields also surged accordingly. On the same day, the 6-month bank bond (unsecured, AAA) yield recorded 4.069%. The 6-month yield exceeding 4% is the first time in about 13 years since January 7, 2009 (4.12%).

According to the Korea Financial Investment Association, as of the 18th this year, the amount of bank bonds issued by banks reached 167.669 trillion won, accounting for 91.5% of last year's annual issuance amount (183.2123 trillion won). Bank bond issuance, which was 10.47 trillion won in April, soared to 24.71 trillion won in July, the highest this year. Last month, it recorded 25.88 trillion won, setting a monthly record high.

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