[Initial Insight] Why Was the Financial Services Commission Not Proactive?

Song Hwajeong, Deputy Head of Finance Department

At the comprehensive National Assembly audit held on the 24th by the National Assembly's Political Affairs Committee targeting the Financial Services Commission and the Financial Supervisory Service, severe criticism was directed at the financial authorities for their delayed response to the liquidity crunch in the bond market triggered by Legoland.

When the liquidity crunch in the bond market emerged due to the default of Legoland asset-backed commercial paper (ABCP), the government hastily convened an emergency macroeconomic financial meeting on the 23rd and announced liquidity support measures amounting to '50 trillion won + α.' This action came almost a month after Gangwon Province declared the default of the Legoland project on the 28th of last month. Earlier, on the 12th, the Financial Services Commission expanded its capacity to purchase corporate bonds and commercial paper (CP) from 6 trillion won to 8 trillion won to strengthen support for low-credit companies facing financing difficulties and to address recent instability factors in the bond market such as ABCP related to real estate project financing (PF). On the 20th, it also postponed the normalization of the bank's integrated Liquidity Coverage Ratio (LCR) regulatory ratio by six months. However, these measures were insufficient to calm the volatile market, leading to an urgent meeting on Sunday and the announcement of liquidity support plans.

Defaults and bankruptcies cause enormous ripple effects on the economy. Even those unfamiliar with economics can sense from past experience that the moment words like default or bankruptcy appear in the news, an economic crisis may be imminent. When Gangwon Province announced the default of Legoland, it was expected that the market would be shaken, but no government measures followed to address the issue. Despite the commercial paper, which had the highest credit rating (A1) guaranteed by the local government, being defaulted due to the local government's refusal to guarantee, there was no immediate government response or action.

While the government remained inactive, the bond market began to freeze, with high-quality bond issuances consecutively failing. In the CP market, ABCP interest rates soared from 3-4% a month ago to 7%, and some refinancing issuances were blocked, intensifying the crisis.

Until now, the Financial Services Commission has urged financial institutions to take proactive crisis responses. Especially this year, as volatility in domestic and international financial markets increased and recession concerns grew, the Financial Services Commission strengthened its emergency response monitoring system by expanding and reorganizing the financial market inspection meeting into a Financial Risk Response Task Force (TF). Kim So-young, Vice Chairman of the Financial Services Commission who chairs this meeting, emphasized, "We must closely monitor financial market movements to timely detect risk factors and manage to prevent excessive spread of market anxiety," and added, "Primary risk management efforts by financial companies are necessary to prevent repeated cases where liquidity crises in some financial companies translate into financial market instability." However, in this incident, the Financial Services Commission neither detected risk factors in a timely manner nor managed to prevent excessive spread of market anxiety.

At the National Assembly audit, in response to criticism over delayed measures, Kim Ju-hyun, Chairman of the Financial Services Commission, admitted that "the response was inadequate." Amid concerns over a global economic recession and the credit market shaking, public anxiety is growing. The public no longer wants to witness the authorities' inadequate response because they understand what kind of crisis such complacent and immature government responses can cause. Although the initial response was inadequate, it is hoped that the containment process will proceed maturely and stability will be restored as soon as possible.

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