BOK: "Securities Firms’ Short-Term Funding Rises Rapidly... Compound Risks Require Vigilance" [Financial Stability Situation]

Net Issuance of CP and Short-Term Bonds Reaches 40 Trillion Won in First Half

Outstanding Retail RPs Up by 17.9 Trillion Won

Capital Adequacy Ratio Falls from 195.4% to 162% Under Compound Shock Scenario

The Bank of Korea has analyzed that as securities firms have rapidly scaled up their assets and liabilities since the second half of last year by attracting client funds and expanding corporate finance, their short-term funding has also increased sharply. According to the analysis, this could expose the firms to compound risks in terms of liquidity, credit, and the market if market volatility expands.

On September 22, in its 'Financial Stability Situation in September 2026,' under the section 'Assessment of Potential Risks by Type of Securities Companies' (Kim Sanguk, Ko Euna, Hwang Bohyun, Moon Seongwon, Kim Changhun, Lee Youngsun), the Bank of Korea stated that the overall capital and liquidity positions of securities firms remain sound. However, as the proportion of short-term borrowings continues to rise and the supply of long-term and venture capital is expected to increase, attention should be paid to the potential widening of the maturity mismatch between assets and liabilities.

The short-term funding of securities companies has recently been increasing. This surge is driven by greater demand for funds resulting from the expansion of corporate finance and investment in marketable securities, the need to secure resources for credit offerings, and higher margin requirements related to derivatives trading. In the first half of this year, commercial papers (CP) and short-term bonds were issued on a net basis in amounts of 23 trillion won and 17.3 trillion won, respectively. As funding via comprehensive asset management accounts (CMA) based on stock market funds increased, outstanding repurchase agreements (RP) sold to clients also grew by 17.9 trillion won, reaching a balance of 131.1 trillion won at the end of the second quarter compared to the same period last year.

The Bank of Korea pointed out that since securities firms are using these short-term funds to invest in assets with relatively longer maturities—such as corporate bonds and credit offerings—the rollover risk could grow if market funding conditions tighten or investor sentiment weakens. As of the end of the second quarter this year, the average maturities were 1.7 years for bonds and 4.3 years for credit offerings, whereas funding maturities were much shorter: 8.5–17.6 days for RP sales, and 0.46 years for CP and short-term bonds.

With the expansion of corporate finance, investments in corporate bonds have also increased, which could amplify the burden on securities firms if credit spreads widen or corporate creditworthiness deteriorates. Corporate bond holdings by securities firms rose from 43.5 trillion won in the first quarter of 2024 to 65.6 trillion won at the end of the second quarter this year, up by 22.1 trillion won. Of this, holdings of non-investment-grade and unrated corporate bonds increased by 8.5 trillion won, from 11.1 trillion won to 19.6 trillion won over the same period.

Risks related to real estate project financing (PF) have also not been fully resolved, raising the possibility that further PF defaults could lead to increased credit risk for securities firms. In particular, the NPL (non-performing loan) ratio for PF loans at small and mid-sized securities firms remained high at 22.7% as of the end of the second quarter this year.

The Bank of Korea also pointed out that market risk driven by interest rate and stock price fluctuations could become an issue. As of the end of the second quarter this year, marketable securities held by securities firms totaled 559.2 trillion won, with bonds accounting for 56.2% of that amount. If interest rates rise, bond values decline, which could negatively affect firms' marked-to-market gains and capital. Stocks (15.2%) and funds (11.7%) held by these firms could also see increased variability in evaluation and trading gains or losses, should domestic stock price volatility intensify.

A stress test by the Bank of Korea, simulating a complex shock scenario involving simultaneous asset price adjustments (sharp equity declines and wider credit spreads as in 2020) and funding strains (higher market interest rates and increased rollover risk as in 2022), showed that as of the second quarter this year, the liquidity coverage ratio fell by 10 percentage points, from 116.4% to 106.4%, and the capital adequacy ratio dropped by 33.4 percentage points, from 195.4% to 162.0%.

The Bank of Korea emphasized, "For firms with high risk weights relative to their equity capital, heavy debt guarantee obligations, and similar operating structures focused on corporate credit offerings, key financial soundness indicators are estimated to deteriorate significantly in the event of compound shocks. We should strengthen monitoring of liquidity risk and loss-absorbing capacity, especially for the securities firms with large debt guarantee burdens."

This content was produced with the assistance of AI translation services.