Top regulator, bank chiefs pledge to cooperate to stabilize debt market amid credit crunch

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Financial Services Commission Chairman Kim Joo-hyeon (L) speaks during a meeting with commercial bank executives at the Hall of Banks in Seoul on Wednesday. (Yonhap)

South Korea’s top financial regulator on Wednesday sought the cooperation of local banks to stabilize short-term bond and money markets and help capital flows to businesses and small traders in need.

Kim Joo-hyeon, head of the Financial Services Commission, made the request during a meeting with heads of major commercial banks amid concerns over a credit crunch triggered by a series of destabilizing market events, in particular the payment default linked to Legoland.

“Worries about a credit crunch remain elevated due to an excessive contraction in sentiment,” Kim said at the meeting in central Seoul. “If the market stabilization efforts of the government and the efforts of the banks are combined, it would be useful to provide funds to companies and small traders and to stabilize the bond and money markets in the short term”.

Senior officials who attended the meeting reaffirmed their earlier pledge to inject liquidity in close conjunction with the government’s market stabilization efforts.

“The banking community seems determined to take more active measures in response to a market crisis,” said Kim Kwang-soo, head of the Korea Banking Federation. “Banks will perform the functions expected of the financial community.”

The meeting came as concerns about a credit crunch persisted following the default on municipally guaranteed debt issued to build the Legoland theme park in the eastern province of Gangwon.

Volatility escalated further later as Heungkuk Life Insurance Co. said it would not exercise a call option for the hybrid bonds, citing unfavorable market conditions. It was a rare move seen as seriously undermining confidence in the debt market.

Although the insurer reversed its decision and promised to exercise the purchase option later, market sentiment was shaken, with many worrying that this indicates the seriousness of the challenges facing corporate bond and short-term money markets are already struggling with rapidly rising borrowing costs. caused by global monetary tightening.

The government announced a series of market-stabilizing measures, including injecting at least 50 trillion won ($36.3 billion) in liquidity, mostly through bond-buying programs.

In a bid to contain soaring market rates, major banks have pledged to minimize their bond sales and inject about 95 trillion won in liquidity to dampen market volatility. (Yonhap)

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