Deposit Interest Rates to Rise Further Due to Bank Bond Issuance Restrictions

[Asia Economy Reporter Song Hwajeong] As banks refrain from issuing bank bonds due to instability in the bond market, deposit interest rates are expected to rise further. Additionally, the concentration of loans is also expected to intensify.

According to the Korea Financial Investment Association on the 2nd, the amount of bank bonds issued last week was 3.43 trillion won, about half compared to the previous week (6.75 trillion won).

The reduction in bank bond issuance is expected to lead to an increase in deposit interest rates. Until now, banks have raised funds through bank bond issuance to respond to the outflow of low-cost deposits and the increase in corporate loans. However, amid the recent Legoland incident causing a sharp tightening in the corporate bond market, as funds in the market flocked to bank bonds, financial authorities requested banks to refrain from issuing bank bonds. With funding through bank bonds blocked, banks are now forced to attract deposits and savings by raising interest rates.

In particular, as corporate bond issuance becomes difficult due to the bond market tightening, corporate loans are expected to increase further. The outstanding corporate loans of the five major commercial banks (KB Kookmin, Shinhan, Hana, Woori, NH Nonghyup) reached 704.67 trillion won at the end of October, surpassing 700 trillion won. This is nearly a 10 trillion won increase compared to the end of September. According to Kiwoom Securities, the five major banks raised 47.7 trillion won in time deposits, 28 trillion won in marketable deposits, totaling 47 trillion won in deposits during October.

Seo Youngsoo, a researcher at Kiwoom Securities, analyzed, "Banks actively raised time deposits and marketable deposits as loan demand surged due to the need to prepare for additional outflows of low-cost deposits and matured low-interest time deposits, and the worsening bond market tightening made it difficult for companies to raise funds in the bond market." The issuance amount of bonds rated AA- or below in October was 200 billion won, significantly down from 1 trillion won the previous month.

The restriction on bank bond issuance is also expected to deepen the concentration of loans. Banks have issued hybrid capital securities and subordinated bonds to meet the Basel III (BIS) capital ratio regulations. Hybrid capital securities and subordinated bonds are recognized as capital when calculating the BIS ratio and are used as a means to defend capital ratios. This year, due to rising interest rates increasing funding costs and a surge in corporate loans, financial holding companies and banks recorded the largest-ever issuance of hybrid capital securities.

The BIS ratio is the value of capital divided by risk-weighted assets, and with the increase in corporate loans this year, risk-weighted assets have increased, causing banks' BIS ratios to decline. According to the Financial Supervisory Service, the total capital ratio based on BIS for domestic banks was 15.29% at the end of June, down 0.23 percentage points from the end of the previous quarter. Banks must minimize bond issuance and reduce risk-weighted assets to comply with BIS ratio regulations. A representative of a commercial bank said, "Since bond issuance is difficult, we have to increase high-quality loans to meet BIS ratio regulations." Ultimately, lending to low-credit borrowers or small and medium-sized enterprises will be tightened, and the concentration of loans to high-quality borrowers is expected to intensify.

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