The size of the short-term money market of South Korea topped 350 trillion won as of the end of last year. In 2019, the market grew more than 50 trillion won and showed the most rapid growth since 2013, when the size increased by 16.8 percent.
The Bank of Korea announced on March 30 that the size increased from 302 trillion won to 355 trillion won in 2019. The short-term money market is where financial products with maturity of one year or less are traded, examples of which include repurchase agreements (RP), certificates of deposit (CD), commercial papers (CP) and short-term bonds (STB).
The CP and RP markets grew 15.2 percent or 24.1 trillion won and 22.8 percent or 17.2 trillion won, respectively. The growth of the RP market was led by bond hedge funds and securities companies’ investment expansion in the bond market. The average daily trading volume in the market was 92.6 trillion won in 2019, 17.2 trillion won more than in the previous year. For reference, the amount of increase was 13.9 trillion won in 2018.
The Bank of Korea pointed out that the RP market is not free from risks. Securities companies in the hedge fund market purchase treasury bonds, high-grade corporate bonds, and the like with their funds and repurchase bonds by borrowing money in the RP market by using those bonds as collaterals. The problem is that financial market fluctuations attributable to variables such as the spread of COVID-19 cause securities companies to sell their treasury bonds and corporate bonds at giveaway prices with redemption in the RP market becoming increasingly difficult.
In the meantime, the STB and CD markets grew 19.1 percent or 8.8 trillion won and 51.7 percent or 4.5 trillion won in 2019, respectively. On the other hand, the call market shrank by 1.8 trillion won as banks increased deposit- and CD-based financing and reduced their call money in order to meet the new loan-to-deposit regulations implemented this year. In addition, banks focused on deposit expansion rather than loan reduction in response to the new regulations. Commercial banks’ time deposits increased 56.4 trillion won from a year ago and 40 percent of the increment took the form of asset-backed commercial papers based on time deposits.
“Banks increased financing based on CDs and time deposits rather than call borrowing as ultra-short-term borrowing,” the central bank explained, adding, “This year, CD issuance is unlikely to increase a lot with banks already complying with the new regulations.”