Financial Services Commission "Bank LCR Regulation Normalization Delayed by 6 Months"... Will Short-Term Funding Ease?

On the 20th, Financial Services Commission Holds Meeting with Bank Fund Managers
Expected to Stabilize the Bond Market

[Asia Economy Reporter Sim Nayoung] The Financial Services Commission announced on the 20th that it will postpone the normalization of the integrated Liquidity Coverage Ratio (LCR) regulation for banks by six months. This is to secure liquidity in the short-term funding market.

On the same day, the Financial Services Commission held a financial market inspection meeting chaired by the Director of the Financial Industry Bureau with the Financial Supervisory Service and financial officers from the five major commercial banks (Kookmin, Shinhan, Hana, Woori, and NongHyup). At the meeting, representatives from the commercial banks requested a postponement of the LCR regulation normalization, and the financial authorities accepted the request.

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 30 days. During the COVID-19 pandemic, the financial authorities lowered the LCR to 85%, but since last July, they have been gradually normalizing it, aiming to raise it to 100% by July next year.

According to the existing normalization plan, the integrated LCR regulatory ratio for banks should be raised to 92.5% by the end of December. However, the Financial Services Commission explained that this has been extended by six months, maintaining the 92.5% ratio until the end of June next year.

The most urgent issue currently faced by banks is the expansion of funding scale. A representative from a commercial bank said, "Whether to meet the LCR ratio required by the Financial Services Commission or to hedge the volatility of over-the-counter derivative transactions caused by exchange rate increases, the overall funding scale had to be expanded."

There are two ways to expand the funding scale. One is to increase deposits by offering products such as special high-interest time deposits, and the other is to issue 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 representative from a commercial bank explained, "Banks requested the Financial Services Commission to postpone the normalization of the LCR regulation to break this chain that destabilizes the current market situation," adding, "Bond market interest rates need to be lowered to stabilize the market."

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%. It is the first time in about 13 years since January 7, 2009 (4.12%) that the 6-month yield exceeded 4%.

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, which is 91.5% of last year's annual issuance amount (183.2123 trillion won). The issuance amount of bank bonds, 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.