The government has decided to extend financial market stabilization measures, currently operating at a scale of 37.4 trillion won (US$28.77 billion), until the end of next year. Additionally, flexibility measures in financial regulations, such as the banks’ liquidity coverage ratio (LCR) and the reserve ratio for savings banks, will also be extended until the first half of next year. While there hasn’t been a recurrence of the credit crunch that occurred in the fourth quarter of last year due to a sudden rise in interest rates, these measures are taken to prevent a recurrence in light of the prolonged period of high-interest rates.
On Nov. 23, the Financial Services Commission held a meeting, chaired by Vice Chairman Kim So-young, with the Financial Supervisory Service and other relevant authorities to review and discuss current financial market issues and communication strategies. They announced the decision to extend various measures aimed at market stability.
As a starting point, the government has decided to extend, for another year, the bond and short-term funding market stabilization measures that have been in operation since last year, with a maximum scale of 37.4 trillion won. As a result, the Bond Market Stabilization Fund valued at 20 trillion won and the Corporate Bonds and Commercial Paper Purchase Program valued at 10 trillion won will be extended and will operate until the end of next year. The 5.7 trillion won worth of Primary Collateralized Bond Obligations program is also set to continue until the end of next year. Additionally, the Securities Project Financing-Asset-Backed Commercial Paper Purchase Program, valued at 1.8 trillion won, will be extended until the end of February 2025.
The financial regulatory flexibility measures originally scheduled to conclude at the end of this year will be extended for an additional six months until the end of June next year. The measures include relaxation of the banks’ LCR from 100 percent to 95 percent, easing of the reserve ratio regulations for savings banks from 100 percent to 110 percent, relaxation of the won liquidity ratio for specialized credit financial companies from 100 percent to 90 percent, increasing the project financing exposure ratio compared to lending assets from 30 percent to 40 percent, and more. Additional relaxation measures for the financial investment industry will continue into the first half of next year, such as reduction of the inclusion ratio of perpetual bonds in assets hedging equity-linked securities from 12 percent to 8 percent, application of a risk value of 32 percent for net capital ratios when purchasing self-guaranteed Securities Project Financing-Asset-Backed Commercial Paper.
The government’s decision to extend financial market stabilization measures stems from the assessment that the high-interest rate environment may persist for an extended period. In the fourth quarter of last year, when interest rates rose sharply, demand for high-quality bonds such as bank bonds and KEPCO bonds surged, causing difficulties in selling corporate bonds and Commercial Paper issued with a maturity of 90 days. As a result, interest rates on corporate bonds and Commercial Paper soared, leading to challenges for companies in securing operational funds.
However, participants in the meeting gathered to emphasize the need to maintain a policy focus on market stability, considering the possibility of prolonged high interest rates next year. The prolonged period of high interest rates is increasing the cost burden for companies, and there is a growing polarization with the spread between high-quality bonds, represented by the interest differential between 3-year government bonds and 3-year corporate bonds, narrowing while the spread for lower-quality bonds is expanding. Vulnerable industries are experiencing more difficulties in raising funds. The government’s decision to extend financial market stabilization measures is in response to the observed conditions or circumstances.