[Donmaekgyeonghwa] Emergency Measures Buy 3 Months... Crisis Returns Early Next Year

BOK Purchases 6 Trillion Won RP
Financial Services Commission Eases Loan-to-Deposit Ratio Regulations
Urgent Issue Addressed by Meeting Market Demands

Financial Sector Warns "Early Next Year More Risky"
"Maturity Again in 3 Months, Uncertain if Refinancing Will Work"
"Rising Interest Rates May Lower Credit Ratings, Exposing Insolvent Companies"

Financial Services Chair and Heads of 5 Major Financial Groups
To Meet Next Week to Discuss Market Stabilization Measures

Deputy Prime Minister and Minister of Economy and Finance Choo Kyung-ho is presiding over the Emergency Economic Ministers' Meeting held at the Government Seoul Office in Jongno-gu, Seoul, on the 28th. Photo by Hyunmin Kim kimhyun81@

The Bank of Korea and financial authorities have taken all the measures demanded by the market to stabilize the short-term bond market, successfully putting out the immediate fire. However, financial experts warn that this is merely 'buying three months of time' and that 'risks will resurface early next year.'

The Bank of Korea and financial authorities are fully accommodating market demands to treat the 'circulatory failure' in the bond market. On the 27th, the Bank of Korea held a Monetary Policy Committee meeting and decided to include bank bonds and public institution bonds as eligible collateral securities for loans for three months starting from the 1st of next month, allowing financial companies to borrow against these securities.

Currently, the Bank of Korea plans to include nine public institution-issued bonds, such as bank bonds and Korea Electric Power Corporation (KEPCO) bonds, in the collateral securities related to Bank of Korea loans like the Financial Intermediation Support Loan. This will provide banks with more liquidity. The Bank of Korea will also conduct repurchase agreement (RP) purchases worth 6 trillion won. Normally, the Bank absorbs market liquidity by selling RPs, but this time it will inject liquidity by buying RPs.

The Financial Services Commission has also eased the loan-to-deposit ratio regulations for banks to the level seen during the COVID-19 crisis, enabling banks to extend more loans to companies. The loan-to-deposit ratio limit (the ratio of loan balances to deposit balances) has been relaxed to 105% for banks and 110% for savings banks. The current regulatory ratio is 100% for all. Following the normalization of the Liquidity Coverage Ratio (LCR), lowering the loan-to-deposit ratio threshold gives banks additional room to expand corporate lending.

Market participants emphasize that the speed of implementing the announced measures is crucial. A representative from a commercial bank said on the 28th, "While the scale and variety of support measures partially meet market expectations, if the implementation is delayed, market skepticism may resurface. For example, although a bond stabilization fund of up to 20 trillion won was announced, without prior consultation with financial companies, additional capital calls may not be made in a timely manner."

If Real Estate Sentiment Does Not Recover... Doubts Over Bond Rollovers After Three Months

The Bank of Korea raised the base interest rate by 0.5 percentage points, and the real estate transaction market's freeze is expected to prolong. On the 13th, a red light was on at a traffic signal near an apartment in downtown Seoul.

A representative from a commercial bank's treasury department said, "The short-term bonds whose liquidity is being supplied now will mature again in three months, and it is questionable whether they can be properly rolled over then. The government announced real estate measures yesterday, but three months is too short a time for these to lead to sales and revive real estate sentiment, so market participants believe the rollover issue will arise."

In particular, if the U.S. Federal Reserve (Fed) continues to raise its benchmark interest rate, the Bank of Korea will have no choice but to raise its own rate. This, combined with a stagnant real estate market and rising raw material prices, could exacerbate problems with real estate project financing (PF) defaults. Additionally, some companies that have managed their finances recklessly may also face risks.

It is expected that by early next year, the benchmark interest rate will reach 3.5% or 3.75%, and yields on even high-grade corporate bonds could soar to 6-7%, leading to the emergence of distressed companies one by one.

A senior bank official explained, "The point at which it becomes difficult to raise funds at those rates will be reflected in companies' financial statements starting early next year, and companies with downgraded credit ratings will begin to appear everywhere. Companies that have operated recklessly will not be able to endure and will either undergo restructuring or be put up for sale in the market. That is when the real crisis will begin."

Could Escalate into a Credit Crisis Early Next Year

Deputy Prime Minister for Economy Choo Kyung-ho, Bank of Korea Governor Lee Chang-yong, and Financial Services Commission Chairman Kim Joo-hyun are attending the 'Emergency Macroeconomic and Financial Meeting' held on the 23rd at the Bankers' Hall in Jung-gu, Seoul. Photo by Yoon Dong-joo doso7@

While recent funding market instability was a temporary liquidity crisis caused by a lack of circulating funds, from next year onward, there is a possibility it will develop into a credit crisis where project financing sites or companies themselves become problematic due to actual business failures.

Another official said, "As Warren Buffett said, when the water drains from the pool, you can see who was swimming naked. The era of great difficulty has come for financial companies and businesses that have taken high risks and earned large profits. The government's and financial authorities' recent measures were large-scale interventions to put out the immediate fire and rescue everyone at once, but going forward, it will be necessary to distinguish between sound and unsound companies or PF projects and clean up truly insolvent ones."

Meanwhile, Financial Services Commission Chairman Kim Joo-hyun will meet next week with the heads of the five major domestic financial holding companies to discuss measures to stabilize the financial market. At this meeting, Chairman Kim is expected to emphasize the role of financial holding companies in stabilizing the financial market amid the current interest rate hikes and urge them to participate in the government's market stabilization efforts. The financial holding companies have agreed to actively participate in market stabilization measures such as the reorganization of the bond and securities market stabilization fund. They also pledged to reduce the issuance of commercial paper (CP), short-term bonds, and bank bonds, supply liquidity to the short-term funding market, and provide support to ease funding difficulties faced by their affiliates.