[Donmaekgyeonghwa] Government Injects 50 Trillion Won+α... Financial Sector Says "More Measures Needed"

Banks and Securities Firms: "Relieving Liquidity Crunch May Only Have Short-Term Effects"

Chaean Fund's 20 Trillion Won Insufficient... Securities Firms Call for "SPV or Special Loans"

[Asia Economy Reporters Sim Nayoung, Lee Changhwan, Hwang Junho] As the ABCP (Asset-Backed Commercial Paper) default crisis at Legoland Gangwon Province dries up the short-term bond market liquidity, the government announced a 50 trillion KRW+α liquidity supply program. However, banks and securities firms believe additional measures are necessary to resolve the liquidity crunch.

Although this may temporarily ease the bond market's strain, the Bank of Korea's additional base rate hikes are already a foregone conclusion, and real estate project financing (PF) loans remain ticking time bombs that could default at any time. The financial industry emphasizes the need to sufficiently supply liquidity to the market to eliminate risk factors.

The 50 trillion KRW+α liquidity supply program is divided into four main parts: a 20 trillion KRW Bond Market Stabilization Fund (hereafter Bond Stabilization Fund), a 16 trillion KRW corporate bond and CP purchase program, 3 trillion KRW support for securities firms facing liquidity shortages, and 10 trillion KRW in business guarantee support from the Housing and Urban Guarantee Corporation and the Korea Housing Finance Corporation.

Financial circles believe this will help put out the immediate fire. A representative from a commercial bank said, "The government has sent a strong message by specifying the amount, so we expect it to be effective," but added, "However, with exchange rates fluctuating and the US Federal Open Market Committee raising interest rates, bond yields could spike again, so this measure might only have a short-term effect."

Deputy Prime Minister for Economy Choo Kyung-ho attended the 'Emergency Macroeconomic and Financial Meeting' held at the Bankers' Hall in Jung-gu, Seoul on the 23rd, and is briefing the meeting results after the meeting./Photo by Yoon Dong-joo doso7@/Photo by Yoon Dong-joo doso7@

Kim Sanghoon, a researcher at Shinhan Investment Corp., also said, "This measure is more about restoring market confidence than comprehensive liquidity support," but added, "Nevertheless, it is meaningful as a large-scale linked support measure." He continued, "The issue started with PF ABCP but expanded through the short-term funding market crunch for securities firms and construction companies to a broader credit bond market squeeze. This measure will break the vicious cycle of the problem."

The financial sector argues that, along with the government's included liquidity coverage ratio (LCR) normalization deferral, additional measures such as easing the loan-to-deposit ratio (LDR) regulation and relaxing securities firms' net capital ratio (NCR) rules are necessary. Currently, the LDR for household loans must be maintained above 115%, but they have requested it be lowered to 100%.

Some also point out that the 20 trillion KRW Bond Stabilization Fund is insufficient to fully resolve the liquidity crunch in the capital market. Especially, sectors directly related to real estate project financing (PF) defaults, such as construction and securities firms, are experiencing severe liquidity shortages, leading to calls for increasing the size of the Bond Stabilization Fund.

Some Say "20 Trillion KRW Bond Stabilization Fund Is Insufficient"

According to NICE Credit Rating, the outstanding balance of PF securitized bonds (ABSTB, ABCP) maturing from October to year-end at securities firms reaches 27 trillion KRW. During the same period, construction companies face about 5.1 trillion KRW.

Credit rating agencies are most concerned about the liquidity crisis in the issuance market transferring to credit risk for each market participant. Lee Myungjun, senior researcher at NICE Credit Rating, analyzed, "Currently, securities firms are managing to refinance with their liquidity, but if this period extends, the suspension of refinancing issuance will increase credit risk for construction and securities firms."

Construction and securities firms are indeed struggling to secure funds. Lotte Construction announced on the 20th that it will borrow 500 billion KRW for three months from Lotte Chemical. This came just two days after announcing a 200 billion KRW capital increase on the 18th. The company has PF ABCP maturing within the year totaling 3.1 trillion KRW.

Companies with parent firms are managing to hold on, but smaller construction firms are unable to secure funds and face imminent default risks. Wooseok Construction, the sixth-largest construction company in Chungnam Province, was processed for a first default last month after failing to cover a bill payment deadline.

Korea Investment & Securities fully purchased the matured Wanju PF ABCP on the 19th. Usually, refinancing issuance reduces liquidity burdens, but investors refused refinancing, so the lead manager Korea Investment & Securities used its own funds. Kyobo Securities fully purchased the matured Cheonan Northern BIT Rich First Asset-Backed Short-Term Bond (ABSTB) on the 12th.

Hwang Kyuwan, a researcher at Hana Financial Management Research Institute, said, "The 20 trillion KRW Bond Stabilization Fund prepared by the government seems insufficient to respond to the liquidity crunch caused by this crisis," adding, "It will put out the immediate fire, but PF-related credit squeezes could recur anytime, so the support scale should be increased."

Banks Say "Additional Regulatory Easing Measures Needed"

Banks argue that for the Bond Stabilization Fund to work properly, measures must first be taken so that commercial banks do not have to scramble for funding. A financial industry official said, "The 20 trillion KRW Bond Stabilization Fund is mainly funded by the five major financial holding companies, but if they issue more bank bonds to raise money for the fund, it would be like 'robbing Peter to pay Paul.' The financial authorities should defer the normalization of the liquidity coverage ratio (LCR) to reduce bank bond issuance and lower the loan-to-deposit ratio (LDR) regulation to help banks secure surplus funds."

If the liquidity crunch does not ease, there are calls to temporarily relax securities firms' net capital ratio (NCR) regulations in addition to the banks' LCR normalization deferral. A financial industry official said, "Recently, financial firms have issued capital securities considering capital ratios, so if securities firms' NCR is also eased, overall market liquidity will improve, making it easier for banks to support loans and stabilizing the market."

There are additional bank requests related to LCR. When banks participate in the Securities Market Stabilization Fund (Securities Stabilization Fund), 10% of the committed capital is considered a cash outflow. However, since the purpose is to support the government and financial markets, they request that this not be considered a cash outflow and be excluded from LCR calculations. A representative from E Bank explained, "LCR requires banks to hold cash relative to cash outflows to prepare for bank runs, but even if the bank does not actually contribute to the Securities Stabilization Fund, a certain percentage of the committed amount is counted as cash outflow, lowering the LCR ratio. Excluding unused commitments from cash outflows can defend against LCR ratio declines."

Securities Firms Say "SPV or Special Financial Stability Loans Also Needed"

Within the securities industry, there are criticisms that this measure is a 'stopgap' and may cause side effects later. Moon Namjoong, a researcher at Daishin Securities, pointed out, "The liquidity crunch occurred amid steadily rising market interest rates due to the Bank of Korea's base rate hikes and global liquidity tightening. This measure conflicts with or has limitations against this backdrop." He noted that easing liquidity while raising rates contradicts the Bank of Korea's stance, and the effect of liquidity support may be offset by further rate hikes.

Baek Yunmin, a researcher at Kyobo Securities, said, "The corporate liquidity support organization (SPV) expected by the market and the special financial stability loan system requested by the Korea Financial Investment Association were not included," adding, "Considering the monetary policy stance, these measures are unlikely to be easily decided, so the policy's effect may be limited."

Kim Junsu, a researcher at Kiwoom Securities, said, "This measure is ultimately a temporary fix, and side effects from liquidity supply measures are expected," warning, "It may encourage issuing special bonds to raise funds, deepening oversupply and the crowding-out effect." He added, "The remaining issue is how quickly the support funds will be deployed where needed."

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