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| Bank of Korea Governor Lee Ju-yeol, left, talks with Financial Services Commission Chairman Eun Sung-soo before the second Emergency Economic Council meeting at Cheong Wa Dae on March 24. / Korea Times photo by Wang Tae-seok |
Moody's considers cutting credit ratings for top securities firms
By Park Jae-hyuk
The Bank of Korea (BOK) is being urged to lend its money to domestic securities firms suffering financial difficulties from the coronavirus pandemic.
Facing the financial regulator's growing calls to support liquidity-crunched brokerages, the central bank's monetary policy board is expected to decide whether or not to extend its loans to them directly, during a regular meeting Thursday.
Earlier in April, BOK Governor Lee Ju-yeol hinted that the central bank may grant loans to securities firms in order to stabilize the country's financial market.
"The risk of credit crunch in the domestic financial market cannot be ruled out, considering the spread of the novel coronavirus worldwide and uncertainties in the global financial market," he said at the BOK executive meeting last Thursday.
"If the situation gets worse, we may consider lending our money to non-banking financial institutions to stabilize the corporate bond market, according to the BOK Act Article 80."
The BOK has broadened the eligibility for securities firms, expanded the types of securities for its repurchase agreement transactions program for the short-term funding market, and unveiled its plans to provide unlimited liquidity support for eligible securities firms. However, these measures have not been effective enough to solve the financial difficulties of the domestic securities industry.
In response, Financial Services Commission (FSC) Chairman Eun Sung-soo has demanded indirectly that the BOK supply more liquidity to local securities firms.
He noted in a recent press release that financial companies will be able to raise the money they need from the BOK ― an apparent request for the central bank's additional support for the securities industry.
"If the BOK extends its loans to non-banking financial firms, according to the BOK Act Article 80, this will likely alleviate the burden imposed on the bond market stabilization fund," he said in a press release issued Monday.
According to the FSC, the government-led 20 trillion won ($16 billion) bond market stabilization fund has been raised only for non-financial companies, excluding firms such as brokerages and credit finance companies.
This has aroused concerns that financial firms could suffer a severe capital shortage and calls have grown for the BOK to extend its loans directly to securities firms as an alternative.
Amid the intensifying volatility in the global financial market, local brokerages have been hit by the liquidity crunch, due to massive margin calls that occurred in response to the increasing risks of losses from complex equity-linked securities (ELS).
Although they have issued a large amount of commercial papers (CPs) to secure the U.S. dollars that are needed when margin calls occur, they have faced difficulties in finding buyers for their CPs, as the financial authorities decided not to use the bond market stabilization fund for helping financial firms.
In addition, securities firms are facing another risk of losses from their real estate project financing, because the coronavirus outbreak caused a downturn in the real estate market.
Against this backdrop, Moody's Investors Service said Tuesday it is considering downgrading the credit ratings of Korea's top six securities firms ― KB Securities, Korea Investment & Securities, Mirae Asset Daewoo, NH Investment & Securities, Samsung Securities and Shinhan Investment.
"The review for downgrade reflects our expectation that the volatility in the global and domestic financial markets stemming from the coronavirus outbreak will weigh on the security firms' profitability, capital adequacy, funding and liquidity," the global rating agency said in its report.
"In addition, the firms are vulnerable through their trades related to structured notes, short-term financing business and contingent liabilities, as well as through their accumulation of overseas assets and real estate assets, driven by their increased risk appetite amid low interest rates."
In particular, Moody's expected that a sharp correction in global and domestic asset prices will significantly weaken the Korean securities firms' profitability and earnings.
"Korean securities firms hold significant amounts of bonds and equity investments that could result in valuation losses," it said. "In addition, the firms hold sizeable amounts of structured notes that they hedge directly themselves, increasing the losses from hedge trades."
