Banks Running Out of Funds See Surplus Cash Plummet Within a Month

Commercial Banks' LCR Ratios Fall from 100% to 90% Range
Restrictions on Bank Bond Issuance and Deposit Interest Rate Hikes
Measures to Stabilize Market Cause Banks to Worry About Maintaining Liquidity
Banks Say "LCR Regulation Easing Needed if Conditions Worsen Next Year"

[Asia Economy Reporter Shim Nayoung] As financial authorities pressured banks to restrain bond issuance and lower deposit interest rates, the liquidity indicator showing how much surplus funds banks hold sharply declined. With funding channels tightly blocked but banks needing to deploy funds including 95 trillion won injected into the bond market, banks are on high alert.

According to the four major banks (KB Kookmin, Shinhan, Hana, Woori) on the 13th, the Liquidity Coverage Ratio (LCR) for November fell compared to the previous month. The LCR is a liquidity indicator that shows the ratio of highly liquid assets such as deposits and government bonds relative to the bank’s net cash outflows over 30 days. The higher this figure, the more surplus funds the bank has.

LCR Ratio Plummeted Within a Month

In October, the LCR of the four major banks all comfortably exceeded 100%, but following financial authorities’ instructions to reduce bank bond issuance and lower deposit interest rates, fund inflows became sluggish, causing the ratio to drop to the 90% range within a month. Bank A’s LCR fell from 101.9% to 98.0%, Bank B’s from 102.5% to 96.7%, and Bank C’s from 104.4% to 97.2%. Only Bank D saw an increase from 100.8% to 101.2%, which was explained as due to a temporary rise in foreign currency deposits.

Bank treasury officials offered similar analyses regarding the LCR decline. “Due to financial authorities’ policies, banks have been unable to properly raise funds, and with many customer assets maturing at year-end increasing outflows, the LCR ratio quickly dropped. Although it remains above the regulatory ratio of 92.5%, banks are closely monitoring the situation as they do not know how long the government’s tightening policies will last.”

Funding Channels Blocked for Banks, Can Endure Until This Year But...

The Financial Services Commission blocked banks’ funding channels to extinguish the urgent fire in the bond and money markets. After the Legoland incident caused bond market stagnation, authorities recommended restraining bank bond issuance to redirect funds into corporate bonds and asset-backed securities. Accordingly, the net issuance of bank bonds in November, according to the Korea Financial Investment Association’s Bond Information Center, was minus 3.2 trillion won. The same trend continued in December with minus 710 billion won.

The directive not to raise deposit interest rates at commercial banks was for a similar reason. As commercial banks raised rates, funds flowed from the secondary financial sector, including savings banks, into commercial banks. When signs of liquidity tightening in the secondary financial sector were detected, financial authorities instructed commercial banks to lower rates even after the Bank of Korea raised the base rate. The impact was immediate. As of the end of November, new fixed deposit subscriptions at the four major banks totaled approximately 62.5985 trillion won, down 9.3082 trillion won from 71.9067 trillion won at the end of October.

Banks, which recorded record-high earnings from last year through this year, have the stamina to endure the authorities’ directive to “block funding channels but release funds,” but they express concern that the situation may change next year.

A representative from a commercial bank said, “Typically, about a year after interest rate hikes begin, individual and corporate bad loans start to surface, and if household loan contraction continues next year, banks’ earnings will worsen compared to this year. To maintain profitability indicators, authorities need to go beyond postponing LCR regulatory tightening and instead ease LCR regulations to reduce funding costs.”

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