Bank Bond Issuance Amount '0 Won' on 24th and 26th... Signs of 'Funding Black Hole' Disappearing

Last week, issuance exceeded 1 trillion won daily
but dropped to 0 won on the 24th and 26th... 860 billion won on the 25th

LCR regulation easing delay, influence of financial authorities
Secondary financial sector sees fund inflow via corporate bonds and expects bond yield decline

[Asia Economy Reporter Sim Nayoung] The issuance of bank bonds by commercial banks has abruptly come to a halt. According to the Bond Information Center of the Korea Financial Investment Association on the 26th, the issuance amount of bank bonds on the 24th and 26th was zero. Even financial authorities have described this as an "unusual event" given the recent trends in bank bond issuance. Bank bonds, often called a black hole that absorbs market funds, recorded a monthly all-time high issuance amount of 25.88 trillion KRW last month and had been soaring. Until last week this month, the daily average issuance amount of bank bonds reached 1.35 trillion KRW.

This trend reversed sharply starting from the 23rd. On that day, the ABCP (Asset-Backed Commercial Paper) default incident at Legoland in Gangwon Province dried up the short-term bond market's liquidity, prompting the government to announce a liquidity supply program of 50 trillion KRW plus alpha. The Financial Services Commission (FSC) also announced plans to postpone for six months the increase in the Liquidity Coverage Ratio (LCR) regulatory ratio to reduce bank bond issuance.

The LCR is a liquidity ratio regulation by the Bank for International Settlements (BIS), referring to the ratio of high-quality liquid assets to net cash outflows over 30 days. The higher this ratio, the more banks need to expand their funding scale, which required issuing bank bonds. This was why bank bonds issued by AAA-rated commercial banks had recently swept up market funds. However, with the FSC announcing it would maintain the LCR regulation at the current level (92.5%), the momentum for bank bond issuance disappeared this week.

On the 26th, the FSC held a financial market inspection meeting with the Financial Supervisory Service and deputy heads of five major banks. At this meeting, banks stated, "The banking sector's funding capacity has increased due to the postponement of the LCR normalization measures." Accordingly, they added, "We will supply liquidity by purchasing CP (Commercial Paper), ABCP, electronic short-term bonds, buying RP (Repurchase Agreements), and managing MMF (Money Market Funds)," and "We will respond to the capital call of the Bond Market Stabilization Fund and minimize bank bond issuance."

A representative from a commercial bank explained, "Banks had mainly issued short-term bank bonds with maturities of three or six months, so there were concerns about refinancing, and the currently high bond yields were also a burden. Fortunately, funds continue to flow into banks through deposits and savings, and with the FSC's postponement of LCR regulatory tightening, the authorities' influence has led to a sharp reduction in bank bond issuance."

There is also hope that the reduction in bank bond issuance will help calm the bond yield market somewhat. An FSC official said, "If the issuance of bank bonds, which absorbed market funds, is minimized, funds can be raised through bonds of the lower-credit second-tier financial sector or corporate bonds," adding, "This will also have the effect of lowering overall bond market interest rates."

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