[Bank as a Pillar] ⑤ 'TokTok' Blocking Anxiety... "Incentives Needed"

'Checking Risk Factors in Financial and Capital Markets'
Researcher Kim Young-do "Financial Markets Will Regain Composure"

Economic and financial authorities attending the 'Emergency Macroeconomic and Financial Meeting' held on the 23rd of last month at the Bankers Hall in Jung-gu, Seoul. As concerns over liquidity tightening grew due to the Legoland incident, the government and financial authorities announced a support package worth "50 trillion won plus alpha (α)." (From left: Lee Bok-hyun, Financial Supervisory Service Governor; Lee Chang-yong, Bank of Korea Governor; Choo Kyung-ho, Deputy Prime Minister for Economy; Kim Ju-hyun, Financial Services Commission Chairman; Choi Sang-mok, Senior Secretary to the President for Economic Affairs). / Photo by Yoon Dong-ju doso7@

[Asia Economy Reporter Song Seung-seop] It is anticipated that the large-scale liquidity support measures by the banking sector will significantly contribute to stabilizing the financial market. However, since the financial market may continue to be volatile, it is advised to provide incentives to liquidity providers.

According to the Financial Research Institute on the 23rd, Senior Researcher Kim Young-do stated in the recent report "Review of Financial Market and Capital Market Risk Factors" that "although some have criticized the financial authorities for a delayed response," considering that the spread of financial market anxiety could be faster than expected, the emergency measures are judged to have helped stabilize market sentiment.

Recently, the domestic financial market has been unstable due to the default processing of Legoland Asset-Backed Commercial Paper (ABCP) and the non-exercise of call options on new capital securities in the insurance industry. As difficulties in the funding market increased, the government, financial authorities, and the Bank of Korea consecutively announced large-scale liquidity supply plans. However, many criticized the measures as "delayed" since they were announced about a month after the remarks by Governor Kim Jin-tae of Gangwon Province, which triggered the situation.

The five major financial holding companies plan to provide a total of 95 trillion won (tentative plan) in market liquidity and affiliate funding support by the end of this year. Researcher Kim evaluated, "The government's expansion and activation of liquidity support programs such as the Debt Relief Fund, along with private financial companies like banks announcing, preparing, and implementing their own financial market liquidity supply plans one after another, will serve as an opportunity for the financial market to regain some composure from vague anxiety."

"Need to Consider Temporary Incentives for Liquidity Providers"

However, he viewed that the funding market would not fully recover just because liquidity is temporarily supplied in large amounts. Although the current signs of funding market tightening were triggered by the Legoland and insurance industry issues, multiple problems overlap in the background. Researcher Kim pointed out, "The primary cause is an unprecedented rapid interest rate hike," adding, "Korea Electric Power Corporation (KEPCO), which is expanding its deficit, issued a large volume of KEPCO bonds, and banks expanded their bank bond issuance, rapidly absorbing funds from the market."

He further explained, "In preparation for the possibility that financial market instability may continue next year, additional measures need to be considered. It is necessary to devise policies that fundamentally alleviate fund concentration by reducing the net issuance volume of high-quality bonds such as KEPCO bonds and bank bonds." This means creating a situation where KEPCO and banks, which absorb market funds, do not need to issue large-scale bonds.

He also advised, "From the liquidity supply perspective, it is necessary to consider whether temporary incentives can be provided to investors supplying funds to the bond and funding markets."

He emphasized the role of the private sector in solving fundamental problems. Researcher Kim said, "Rather than indiscriminate support, accumulated insolvencies should be sequentially resolved under reasonable loss-sharing principles," and added, "It is expected that harmonious solutions will be prepared and implemented through cooperation not only from policy authorities but also from the private sector."