[Initial View] Authorities Cutting Off Funds and Urging Spending: Banks Can't Last Long Either

[Asia Economy Reporter Sim Nayoung] The term 'ppang shuttle,' which even appears in Korean dictionaries, refers to the act in middle and high schools where weaker students are forced by stronger students to buy bread or drinks on their behalf. This has also given rise to a popular phrase: "Here, take 1,000 won, buy 4 pieces of bread and 2 milks, and bring back 500 won change."

These days, commercial banks liken the financial authorities' guidelines to this 'ppang shuttle.' Although it sounds like a joke, it carries a sharp meaning. It implies that contradictory policies are emerging. The core of the authorities' orders is to block the inflow of money into banks while urging them to release more funds.

Last month, even after the Bank of Korea raised the base interest rate, the financial authorities instructed banks to lower deposit interest rates again. Earlier this summer, they had said, "Deposit interest rates should be reviewed at least once a month to reflect market rate changes in the base rate" (July 6, interest rate disclosure system improvement plan), but now the stance is completely reversed. Chairman Kim Joo-hyun and the Financial Services Commission have repeatedly sent messages to the banking sector and research institutions to 'refrain from competing for funds.' This drastic measure was taken as the concentration of funds intensified when commercial banks raised deposit and savings interest rates. From the banks' perspective, the channels to raise funds through deposits have been blocked.

After the Legoland incident, demand in the bond market concentrated only on high-quality bank bonds, causing severe liquidity shortages. Commercial banks, which had even reduced bond issuance at the authorities' request, found themselves in an even more difficult position. While all the inflow channels are blocked, the five major banks still have another task: they must inject 95 trillion won into the bond market. This is also a measure demanded by the authorities. "They block the inflow of funds but tell us to mobilize the money we already have and do everything we need to do. If this isn't a ppang shuttle, then what is?" said a senior banking official, with a wry smile but a nod of agreement.

Of course, the financial authorities have their reasons for demanding these contradictory policies. As commercial banks raised deposit interest rates up to 5%, people withdrew funds not only from savings banks but also from securities firms and insurance companies, concentrating them in commercial banks. Since the bond market is already struggling, the authorities feared that if this continued, savings banks, securities firms, and insurance companies would face serious problems. Therefore, they asked commercial banks to restrain interest rate hikes. The authorities' calculation is to take preventive measures before the situation worsens, trying to stop a flood with a spade rather than a scoop.

Nevertheless, there is a reason why this situation cannot be prolonged. Although banks are currently strong enough to endure the 'ppang shuttle,' the financial sector predicts that this could change next year. Securities firms have already forecasted that banks' net income will drop by more than 10% compared to this year. If the decline in household loans continues and non-performing borrowers surface, increasing loan loss provisions, banks that have so far endured may no longer be able to support the system unconditionally.

Bank soundness indicators are already reflecting the authorities' policy of "turn off the faucet but drain only the water collected in the bathtub." The LCR (Liquidity Coverage Ratio), an indicator showing commercial banks' available liquidity, plummeted from the 100% range in October to the 90% range in November in a flash. If the authorities want banks to continue playing a supporting role, it is also their responsibility to urgently devise a Plan B to boost banks' funding capacity.