[The Editors' Verdict] The Financial Services Commission Must Take Bolder Action

Jae-Hyung Jeong Economic and Financial Editor

The financial sector is in turmoil due to the tightening of the bond market. While the market is in chaos, there has been no action from the economic team, including the government, financial authorities, and the Bank of Korea.

The final default of the asset-backed commercial paper (ABCP) related to the Legoland development in Gangwon-do occurred on the 4th of this month, but the government and financial authorities took no significant measures for two weeks. In the commercial paper (CP) market, the ABCP interest rate, which was 3-4% annually a month ago, rose to 7%, and at one point, refinancing issuance was impossible, showing symptoms close to a seizure. In the corporate bond market, since the beginning of the year, banks have issued a large volume of bank bonds due to the government's liquidity coverage ratio (LCR) normalization measures, and Korea Electric Power Corporation (KEPCO) issued 18 trillion won worth of KEPCO bonds this year due to continued deficits. As these high-quality bonds absorbed funds from the bond market through large-scale issuance, other corporate bonds inevitably faced difficulties in issuance.

The financial authorities and the Bank of Korea should have recognized that bank bonds and KEPCO bonds were absorbing funds from the corporate bond market and prepared countermeasures, and the Ministry of Economy and Finance should have properly played the role of control tower. They also needed to establish detailed measures regarding KEPCO's deficits and financing situation. Of course, there were unavoidable factors such as the U.S.'s continuous base rate hikes and inflation. However, that does not excuse inaction.

On the 20th, the Financial Services Commission announced measures such as deferring LCR normalization, rapid purchase of 1.6 trillion won worth of corporate bonds through the Bond Stabilization Fund, and additional capital calls to stabilize the market, but the financial sector viewed these as insufficient to quell market anxiety.

Since the 1997 Asian financial crisis, the government's market stabilization measures have followed three main principles: intervene swiftly before anxiety spreads widely; provide a comprehensive package of measures rather than just one or two policies; and inject funds on a scale much larger than the market expects.

On Sunday the 23rd, the government held an emergency macroeconomic and financial meeting and announced additional measures amounting to '50 trillion won + α.' The Bank of Korea also decided to take an active role. It is believed that, albeit belatedly, proper measures have been introduced.

While the Ministry of Economy and Finance and the Bank of Korea share responsibility for market stabilization, the Financial Services Commission is the main authority for the financial market. The market opinion was that the Financial Supervisory Service should have acted more proactively during this bond market tightening phase, and there are comments that the Financial Services Commission was overly cautious, causing delayed government intervention.

Even if it is not a financial crisis, it is irresponsible for the government not to intervene while financial instability spreads. Appropriate intervention is necessary; doing nothing at all is problematic.

Although the immediate crisis may have been averted, challenges remain, such as further U.S. base rate hikes and concerns over real estate project financing (PF) loan defaults. The secondary financial sector has seen a significant rise in funding costs, but due to the statutory maximum interest rate (20%), loan interest rates cannot be raised, hampering proper business operations. Considering that one of the reasons for lowering the statutory maximum interest rate was low interest rates, it is now necessary to raise the statutory maximum interest rate again in line with the current rise in market interest rates.

The Financial Services Commission is also not taking proper action regarding virtual assets. Regarding the 'Digital Asset Basic Act,' which was a presidential campaign pledge, the Financial Services Commission's stance is that the government will participate if the legislation progresses primarily through the National Assembly. It appears that the government believes it can only act once a social consensus is reached in either direction.

However, as a result of not regulating and neglecting the virtual asset market during its downturn after the first boom at the end of 2017, appropriate regulation and investor protection were not implemented during the second boom in 2021. At that time, the Financial Services Commission's position during the first boom was that virtual assets could not be considered financial products and should not be accepted within the regulatory framework. Given that many people already recognize and invest in virtual assets as assets... it seemed as if they were just waiting for the virtual asset bubble to burst and become worthless.

While it is acknowledged that the government should be somewhat conservative, the Financial Services Commission needs to take bolder action than it currently does.

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