Two Months Into Middle East Crisis, Card Issuers' Funding Rates Jump 0.5%p... "More Serious Than Legoland Crisis"

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"Next Credit Finance Association Chief Must Have Strong Negotiating Power with Authorities"

As the government’s price stabilization policies in response to the prolonged Iran war and the possibility of a Bank of Korea base rate hike intersect, credit card companies are facing mounting challenges. Within just two months of the Middle East crisis, the interest rate on credit-specialized financial bonds (yejeonchae) has surged by nearly 0.5 percentage points, and the upward trend shows no sign of abating, leading to a bleak outlook for the second half of the year.

Some analysts argue that this crisis is far more severe than the “Legoland default incident” four years ago, when rates soared to the mid-5% range, since the current situation stems from both external geopolitical risks and monetary policy shifts.

Yejeonchae interest rates jump 0.5 percentage points in just two months

According to the financial sector and the Korea Financial Investment Association on May 14, the average rate for three-year yejeonchae bonds (credit rating AA+) stood at 4.189% as of May 12. This represents a sharp increase of 0.891 percentage points compared to the end of last year (3.370%). It is the highest level in two years and five months, since December 4, 2023 (4.210% per annum).

Notably, compared to March 3, when the U.S. government announced the death of former Iranian Supreme Leader Ayatollah Seyyed Ali Khamenei and the rate stood at 3.713%, the figure has risen by 0.476 percentage points in just over two months.

Unlike banks, card companies are credit-specialized financial institutions without deposit-taking functions. They procure more than 70% of their business funds through bond issuance. The benchmark is the financial bond (AA+) rate. The yejeonchae (Financial Bond II) rates issued by card companies are set by adding a spread to the benchmark rate, so when the benchmark itself rises, interest costs increase immediately, critically impacting profitability.

"Interest rates and exchange rates are complex variables... Corporate self-help has its limits"

The problem is not only the steep rate hikes but also the abundance of external variables beyond the control of companies. The industry fears that the risk of rising funding costs will persist, putting pressure on the sector throughout the second half of the year. Consequently, a conservative “hold the line” strategy focused on cost reduction and defending asset quality is expected to be inevitable.

In particular, the possibility of an additional Bank of Korea base rate hike is causing anxiety among card companies. The Korea Development Institute (KDI), a state-run think tank, recently recommended a rate hike if inflationary pressures persist. In its “2026 First Half Economic Outlook,” KDI Senior Research Fellow Jung Kyuchul adjusted this year’s growth forecast upward to 2.5%, saying, “To respond to price pressures amid economic expansion, it is necessary to maintain interest rates at a higher-than-usual level.”

A senior executive at a card company commented, “Our biggest concern for the second half is interest rates. If the Bank of Korea actually raises rates, the cost of issuing yejeonchae will spiral out of control, triggering an emergency across the entire sector.”

“If high rates persist, the threat is even greater than during the Legoland incident”

Experts view the current situation as more serious than the Legoland incident four years ago, given that this crisis has struck at a time when the fundamental business competitiveness of card companies has weakened.

They cite several grounds: ▲Unlike the Legoland case, where the problem was local government guarantee defaults, the current crisis is a more structural one driven by global inflation due to geopolitical risk; ▲Previously, the issue was a credit crunch marked by rising spreads, but now even the benchmark government bond rate itself is trending upward; ▲Unlike in the past, when there was hope for a monetary policy pivot, the “higher for longer” scenario—where high rates persist—has become entrenched.

Chae Sangmi, Professor of Business Administration at Ewha Womans University, advised, “While past crises could be resolved by providing liquidity, the current situation requires a fundamental overhaul of the profit structure. To manage asset quality, it is necessary to proactively control credit loss costs, for example by focusing on high-quality customers.”

Suh Jiyong, Professor of Business Administration at Sangmyung University, pointed out, “Diversifying funding sources, such as issuing foreign currency bonds, carries the risk of greater losses if the exchange rate rises. To defend profitability, card companies should reduce excessive product benefits and increase the share of domestic long-term bonds.”

Urgent need to strengthen authorities’ negotiating power... “Strong leadership wanted”

Within the industry, there is a strong desire for robust leadership to drive regulatory easing and policy support. As existing regulations, such as preferential fee rates for affiliated merchants, remain firm, there is a need for a representative who can advocate for the sector’s interests.

This is also why expectations for a “government official” candidate are rising ahead of the upcoming election for the next chairman of the Credit Finance Association, which may be decided as early as next month. According to one source, “There is a pressing need for a leader who can deliver tangible negotiation results with the authorities. There is a preference for a candidate with a government background, who can serve as a reliable communication channel with regulators, rather than someone from the private sector.”

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