Financial Authorities Take Proactive Measures to Mitigate Securities Firms' Risks, Including Encouraging PF-ABCP Loan Conversions

Financial authorities announced on the 24th that they will take measures to proactively mitigate the risks of securities firms related to real estate project financing (PF).

The Financial Services Commission and the Financial Supervisory Service have decided, as a detailed measure, to convert project financing asset-backed commercial paper (PF-ABCP) into loans to resolve the maturity mismatch issue.

Currently, the maturity of real estate projects is 1 to 3 years, whereas the ABCP that supplies funds to these projects typically requires continuous refinancing every 1 to 3 months, causing a maturity mismatch problem. This creates the possibility of recurrence of issues such as a sharp rise in short-term market interest rates for refinancing large amounts of ABCP during short-term financial market tightening, and a rapid increase in securities firms' risks if refinancing fails.

For securities firms that currently have liquidity, if they convert securitized assets such as PF-ABCP guaranteed as of the end of March into loans with matching maturities to the underlying assets, the risk weight of the net capital ratio (NCR) applied to loans will be relaxed from 100% to 32%, equivalent to that of ABCP, to encourage conversion. Through this, approximately 4.9 trillion won out of more than 20 trillion won of real estate-related securitized assets held by securities firms are expected to be converted into loans within this year.

Additionally, financial authorities are promoting the prompt write-off of non-performing loans to manage soundness. The scale of real estate PF loans in the securities industry is about 4.5 trillion won, accounting for about 6% of their equity capital, which is relatively small. However, the delinquency rate was 10.38% as of the end of last year, and with the recent real estate market downturn, the delinquency rate has risen sharply, raising concerns about the soundness of the securities industry.

Accordingly, securities firms are instructed to promptly apply to the Financial Supervisory Service for write-offs of assets already classified as estimated losses based on the reserves set aside, and the Financial Supervisory Service plans to review and approve these applications quickly.

The securities industry PF-ABCP purchase program will also be extended. The 1.8 trillion won scale securities firm-guaranteed PF-ABCP purchase program, which has been operating since the end of last year and was scheduled to end this month, will be extended until February next year.

Currently, due to stabilization in the funding market, the purchase balance has decreased to 103.2 billion won. However, during the market tightening at the end of last year, the program set a sufficient support scale exceeding the total size of ABCP guaranteed by small and medium-sized firms (about 1.5 trillion won) and actively operated by purchasing the entire application amount of 504.5 billion won, which is evaluated to have greatly contributed to stabilizing the securities firm-guaranteed ABCP and the overall short-term funding market.

Furthermore, the NCR risk weight relaxation measure related to direct purchases of self-guaranteed PF-ABCP, which was scheduled to end at the end of June this year, will also be extended until the end of this year. When securities firms directly purchase securitized assets to fulfill guarantees due to ABCP refinancing failure and hold them for a long period, a risk weight of 32% is applied. During the short-term market tightening at the end of last year, this measure was highly effective in preventing a vicious cycle where securities firms dumped securitized assets to manage risk weights, causing a sharp rise in market interest rates and worsening refinancing conditions.

In addition, financial authorities plan to comprehensively review the NCR risk weights related to real estate PF to prevent a recurrence of crisis situations in the securities industry like those at the end of last year. They intend to improve the application method of NCR risk weights related to real estate PF by considering the actual risk-bearing capacity according to company size, business stage, repayment priority, and minimizing regulatory arbitrage depending on the form of funding supply such as loans or debt guarantees.

A Financial Services Commission official said, "Among the detailed measures for proactive risk mitigation, the inducement of PF-ABCP conversion to loans will be implemented immediately through the issuance of a non-action letter by the Financial Supervisory Service," and added, "The write-off inducement of non-performing loans will be encouraged quarterly."

He also stated, "Procedures for extending the securities industry PF-ABCP purchase program and the NCR risk weight relaxation measure for direct purchases of self-guaranteed ABCP will be completed in May and June, respectively," and "Financial authorities will finalize detailed plans to improve NCR risk weights related to real estate PF within this year and decide on the timing of application considering future real estate market conditions."

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