Surge in 'Jeonggi Yegum ABCP' Absorbing Short-Term Funds... A Risk Factor for the CP Market

Intensified Bank Deposit Competition Leads to 4.5 Trillion KRW Net Issuance in October
'Indirect Deposit' Method Attracts Large-Scale Deposits Without Significant Interest Rate Hikes
Concerns Over Reduced Demand for Corporate CP Amid Investor Fund Concentration

As competition for deposits intensifies in the banking sector, the issuance volume of ‘Time Deposit Asset-Backed Commercial Paper (Time Deposit ABCP)’?which is issued using time deposits as collateral in the capital market?is rapidly increasing. Time Deposit ABCP is a convenient means for banks to attract large-scale deposits without significantly raising deposit interest rates. The recent rise in bank bond yields is also analyzed as a cause for the increase in Time Deposit ABCP issuance, which serves as an indirect deposit attraction method. It is pointed out that the inflow of short-term investment demand into the relatively safe Time Deposit ABCP is driving up short-term interest rates, becoming a source of market instability.

Banks Continue to Attract Time Deposits via ABCP

According to the investment banking (IB) industry on the 3rd, on the 1st of this month, Kookmin Bank attracted 247 billion KRW worth of one-year maturity time deposits through trust accounts managed by Hyundai Motor Securities, Suhyup Bank, and Shinhan Investment Corp. The three financial companies that subscribed to the deposits each issued trust beneficiary certificates and sold them to a special purpose company (SPC). The SPC issued ABCP with maturities of 2 to 5 months, using the time deposit trust beneficiary certificates as collateral, to raise funds for the time deposit subscriptions. In effect, the funds raised by issuing ABCP secured by time deposits flowed into Kookmin Bank’s time deposits through the trust.

Hana Bank also attracted 240.9 billion KRW of one-year maturity time deposits using the same method the previous day. Shinhan Investment Corp. subscribed to the time deposits through a trust and securitized the trust beneficiary certificates to raise funds for the deposit subscriptions. NongHyup Bank also received 264.6 billion KRW worth of time deposits with maturities under one year through a trust managed by Hi Investment & Securities this month.

Time deposit subscriptions through securities company trusts surged starting in October. According to the industry, the net issuance amount of Time Deposit ABCP in October reached 4.5 trillion KRW, the largest scale this year. This is interpreted as an increase in time deposit attraction due to many bank time deposits maturing in the fourth quarter and the rise in bank bond yields, making time deposits a relatively cheaper funding source.

The inflow of short-term investment demand into the relatively safe Time Deposit ABCP market is also cited as a cause for the increase in issuance. An IB industry official explained, "Funds from money market funds (MMF), money market trusts (MMT), and wrap accounts (MMW) are flowing into the relatively safe Time Deposit ABCP."

Concerns over ‘CP Market Crowding-Out Effect’... A Source of Instability in the Funding Market

There are concerns that the increase in Time Deposit ABCP is causing instability in the short-term funding market, such as the commercial paper (CP) market. The supply of Time Deposit ABCP has increased, sharply pushing up CP market interest rates recently.

According to the Korea Financial Investment Association, the 91-day (approximately 3-month maturity) CP rate, which was 3.990% in early September, recorded 4.29% as of the 27th of last month. This represents a rise of about 30 basis points (1bp = 0.01 percentage points) over roughly two months. A securities industry official noted, "It is notable that the rate increase was steepest in October, which had many holidays such as the Chuseok holiday and Hangul Day, resulting in fewer business days."

Concerns have also been raised about a crowding-out effect, where Time Deposit ABCP significantly absorbs investment demand in the short-term funding market. The financial authorities’ management to prevent maturity mismatches in MMF and MMW operations has reduced fund inflows into the short-term funding market, which has also influenced the rise in CP rates.

An asset management company official managing MMFs evaluated, "While fund inflows into the short-term funding market have stagnated for some time, net issuance of Time Deposit ABCP alone reached 4.5 trillion KRW in October," adding, "This means that demand for other CPs or short-term bonds has decreased by the amount of net issuance." The official also pointed out, "The increase in CP issuance by public enterprises such as Korea Electric Power Corporation and Korea Gas Corporation is also one of the factors causing instability in the CP market."

An IB industry official said, "If the preference for safe assets in the short-term funding market intensifies, CP market interest rates will rise overall, making it difficult for companies with relatively low credit ratings to refinance or newly issue short-term funds," adding, "Overall, sources of instability in the funding market are increasing."

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