Bond Market Breathes a Sigh of Relief as Bank LCR Regulation Easing is Extended

Financial Services Commission Extends Regulatory Relaxation for 6 More Months
Corporate Bonds Breathe Easier as Bank Bond Issuance Declines

[Asia Economy Reporter Minji Lee] The Financial Services Commission's decision to extend the Liquidity Coverage Ratio (LCR) is expected to bring a sigh of relief to the bond market. As the issuance of bank bonds decreases, corporate bonds may gain some breathing room.

According to the financial investment industry on the 17th, approximately KRW 5.2723 trillion worth of bank bonds have been issued from July until the day before. Bank bonds were issued at about KRW 1.3699 trillion in the first quarter and KRW 2.7127 trillion in the second quarter.

The increase in bank bond issuance in the third quarter is closely related to the LCR relaxation measures. The LCR is an indicator that verifies whether banks hold sufficient liquid assets to withstand one month. It is calculated as the ratio of high-quality liquid assets to cash outflows. Banks issue bank bonds to meet the LCR (previously 100%), but since April last year, the Financial Services Commission had relaxed the standard to 85% under the ‘Financial Regulation Flexibility Measures in Response to COVID-19,’ which was expected to be maintained only until the end of this month. This concern triggered banks' demand for issuing bank bonds.

However, as the Financial Services Commission announced yesterday that it will extend the LCR regulatory relaxation for another six months in conjunction with continued support policies for small business owners and self-employed individuals, the issuance volume of bank bonds is expected to decrease again. Until now, the bond market had anticipated that the end of the LCR relaxation at the end of this month would lead to increased bank bond issuance, causing unstable supply and demand conditions in the bond market until the end of the year. As of the end of the second quarter, the LCRs of the four major commercial banks were Shinhan Bank 88.9%, Woori Bank 90%, KB Kookmin Bank 90.9%, and Hana Bank 91.2%. If banks competitively increase bank bond issuance to meet the 100% LCR by the end of the year, bond prices will inevitably fall further than before. This would heighten supply and demand concerns and could lead to a general weakness in the bond market.

Bond experts predict that the reduction in bank bond issuance could improve the corporate funding environment in the bond market compared to before. Looking at the current bond market environment, the spread, which had narrowed due to uncertainty about the number of base rate hikes, appears to be widening again. A widening spread means that corporate credit risk has increased, making the funding environment more difficult than before. Eun-ki Kim, a researcher at Samsung Securities, said, "Along with the LCR relaxation measures, household loan regulations continue, so banks' demand for issuing bank bonds will remain low for the time being," adding, "Considering these factors, the expansion of the ‘credit spread’ will be limited."