Second Highest Monthly Total This Year
Increased Funding Demand Due to LCR Regulation Normalization and Corporate Loan Growth
"Banks Prefer Issuing Bonds Over Deposit Products Amid Rising Deposit Interest Rates"
As the U.S. central bank, the Federal Reserve (Fed), hinted at additional interest rate hikes, attention is increasing on whether the Bank of Korea's Monetary Policy Committee will raise rates at its meeting scheduled for the 25th. The photo shows a counter at a commercial bank in downtown Seoul on the 19th. Photo by Hyunmin Kim kimhyun81@
[Asia Economy Reporter Minwoo Lee] In September, the net issuance of bank bonds exceeded 4 trillion won, increasing nearly 4.5 times in just one month. This is interpreted as banks judging that issuing bank bonds is a more effective means of raising funds than deposit products such as savings.
According to the Bond Information Center of the Korea Financial Investment Association on the 23rd, the net issuance of general bank bonds from the 1st to the 22nd of this month was recorded at 4.4 trillion won. This is 4.5 times the net issuance of 980 billion won last month. On a monthly basis, it is the second highest level this year following July (7.428 trillion won).
Various backgrounds are being discussed. First, banks need to secure high-quality liquid assets (such as public institution bonds, special bank bonds, government bonds, etc.) due to the normalization of the Liquidity Coverage Ratio (LCR) regulation. LCR is a liquidity ratio regulation under Basel III by the Bank for International Settlements (BIS), referring to the ratio of high-quality liquid assets (cash, reserves, government and public bonds, etc.) to net cash outflows (total cash outflows minus total cash inflows) over the next 30 days. Financial authorities are pushing to normalize the bank LCR from 85%, which was lowered to respond to the COVID-19 crisis, back to 100%. Accordingly, banks must meet an LCR of 100%. It is estimated that banks need to purchase high-quality liquid assets worth 9.4 trillion won to meet this requirement. To secure funds for these purchases, banks are increasing the issuance of bank bonds.
The increase in corporate loans due to various external conditions is also considered a contributing factor. Central banks worldwide are strengthening tightening policies, and the corporate bond market is shrinking due to geopolitical risks such as the war between Russia and Ukraine, leading companies to increase loans. In fact, the corporate loan volume of the five major banks?KB Kookmin, Shinhan, Hana, Woori, and NH Nonghyup?has increased by 51.5392 trillion won since the beginning of this year. Since domestic and international economies are unlikely to improve in the near term, the trend of increasing corporate loans is expected to continue. In this situation, banks, where low-cost deposits are decreasing and relatively high-interest fixed deposits are increasing, are trying to raise funds needed for loans through bank bonds.
In particular, as the authorities continue to pressure banks regarding interest rate spreads disclosure and other interest-related practices, the trend of raising deposit and savings interest rates continues, making bank bond issuance a more efficient method from the banks’ perspective. Deposit interest rates at commercial banks are already approaching 4%. Woori Bank’s fixed deposit product, ‘WON Plus Deposit,’ offers an interest rate of 3.94% for 12 months. Although the 1-year bank bond (unsecured, AAA) interest rate is still higher at 4.121%, considering that deposits are small and numerous and require staff handling, the cost competitiveness of fixed deposits is apparently falling behind bank bonds.
Kim Ki-myung, a researcher at Korea Investment & Securities, said, “In a phase where loan interest rates inevitably rise due to base rate hikes, deposit interest rates are likely to rise at least as fast as the increase in loan interest rates.” He added, “For the foreseeable future, the relative cost competitiveness of bank bonds will remain high, which may lead to increased issuance of bank bonds.”
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