[Bank as a Pillar] ① 1997, 2008... This Time, Banks Have Changed

Banks Act as Firefighters in Unstable Funding Market
"Even with Negative Margins, We Have Raised Funds by Issuing Bonds"

Bond Issuance by Four Major Banks from January to October Nears Last Year's Total
Foreign Currency Bonds Surpass Last Year's Issuance

All Four Major Banks' LCRs Well Above 100%

[Asia Economy Reporters Sim Nayoung and Song Seungseop] Despite the red flags raised in the bond market following Legoland's declaration of default on asset-backed commercial paper (ABCP) and Heungkuk Life Insurance's decision not to exercise its call option, banks are playing a crucial role as firefighters. Unlike previous crises, the three major indicators?soundness, profitability, and liquidity?are all showing robust performance. The financial sector evaluates that the current strength of banks is incomparable to the 1997 foreign exchange crisis, when banks became insolvent due to corporate overinvestment, bankruptcy, and deterioration, or the 2008 financial crisis, which faced foreign currency liquidity issues following Lehman Brothers' bankruptcy in the U.S. [Related Article] 'Banks as Pillars'

An executive at a commercial bank said, "Since the first half of this year, anticipating a real estate crisis and wanting to avoid exposure to risks, we issued bonds to raise funds regardless of costs," adding, "Even if a poor real estate PF (project financing) collapses, only the securities firms involved in that PF will be at risk, and the risk will not spread to the entire financial sector, including banks."

Issuing Bonds Despite Negative Margins... Raising Funds

The four major banks' issuance of won and foreign currency bonds from January to October this year (53.3347 trillion won) has already approached last year's full-year level (54.6853 trillion won). Last year, banks issued bonds to raise funds due to COVID-19 financial support and surging household loan demand, but this year, the reasons were real estate risk defense and financial regulations.

A bank's treasury department official said, "We raised funds by issuing (high-interest) 5-year long-term bank bonds and operated by investing in (low-interest) 3-month government and public bonds, enduring negative margins," adding, "The reason banks issued even $500 million and $300 million foreign currency bonds in the first half of this year, which were not immediately necessary, was to prepare a liquidity buffer."

In fact, from January to October this year, the four major banks raised about $666.6 billion (approximately 8.8 trillion won) through foreign currency-denominated bonds, about 10% more than last year's total ($604.5 billion, approximately 8 trillion won). As domestic bond issuance interest rates rose, banks targeted overseas investors to secure funds more cheaply.

Summarizing the won and foreign currency bond issuance amounts of the four major banks from January to October this year, KB Kookmin Bank led with 16.1772 trillion won, followed by Shinhan Bank with 15.9672 trillion won, Hana Bank with 11.0192 trillion won, and Woori Bank with 10.1711 trillion won.

By the End of October, LCR Ratios of All Four Major Banks Exceeded 100%... Surplus Funds Increased

Meanwhile, banks' surplus funds have increased further. In October, the liquidity coverage ratio (LCR), a key indicator for the four major banks, rose significantly compared to the previous month. LCR is a liquidity regulation that represents the ratio of high-liquidity assets such as deposits and government bonds to net cash outflows over 30 days. The higher the figure, the more abundant the bank's surplus funds.

Until the end of September, the LCR of the four major banks was in the 90% range, but as of the end of October (provisional), all exceeded 100%. Kookmin Bank recorded 101.9%, Shinhan Bank 102.5%, Hana Bank 104.4%, and Woori Bank 100.8%. These levels far surpass the LCR regulatory threshold set by financial authorities (92.5%). Considering that each bank's LCR is about 8?11 percentage points above the regulatory line and that 1% LCR corresponds to approximately 630 billion to 840 billion won, the current funding capacity of the four major banks is estimated at around 29 trillion won.

Commercial banks have announced plans to ease funding market tightness by purchasing special bank bonds, credit finance company bonds, corporate bonds, commercial paper (CP), asset-backed commercial paper (ABCP), and repurchase agreements (RP), as well as operating money market funds (MMF). Accordingly, financial authorities are monitoring daily how much each financial holding company purchases of each bond in the market.

A senior official from the Financial Services Commission said, "Thanks to banks taking the lead, corporate bond and government bond yields have stabilized relatively, except for CP rates," adding, "Since we requested banks to refrain from issuing bonds to stabilize the bond market, we plan to soon prepare alternative funding methods for banks."

Banks Must Play a Role in Preventing Insolvent Defaults... Funds Should Not Flow into Bad PFs

Banks emphasize that it is essential to distinguish between good and bad investments from the moment funds are injected. Funds should be directed primarily to those with sound financial conditions but short-term liquidity shortages, and must not flow into high-risk assets.

A treasury official at Bank B explained, "In addition to funds raised through bond issuance and deposits, the government's postponement of LCR regulation tightening (maintaining LCR at 92.5% until the end of June next year) has given banks additional ammunition," adding, "Banks are selectively deploying these funds mainly to purchase RP, MMF, ABCP, electronic short-term bonds (jeondanchae), and corporate loans."

He continued, "For example, banks should support securities firms that might face a technically insolvent default due to lack of funds despite having assets maturing in a month," adding, "Securities firms should not channel funds to PF projects that are likely to have unsold inventory and require restructuring."

Ultimately, since the bond market tightening stems from real estate PF (project financing), the banking sector believes the situation should be monitored until next year. A treasury official at Bank C said, "Banks will manage to get through the end of this year by acting early, but the key issue is whether PF projects will operate properly next year," adding, "If defaults occur one by one, it is questionable whether small and medium-sized securities firms can withstand the pressure then."