Financial Sector's Capital Securities Boom Raises Eyebrows

In a dramatic shift, financial institutions have ramped up the issuance of capital securities, including subordinated bonds and hybrid securities, stirring concerns over the potential degradation of capital quality. This trend is attributed to the habitual practice of early redemption, which introduces persistent refinancing risks.

Record-Breaking Issuance Scale

Last year witnessed capital securities issuance soaring to an unprecedented 21.7 trillion won, a stark increase from 11.5 trillion won in 2019, as reported by Korea Ratings. Non-bank financial entities, including insurance and securities firms, led the charge with 13.5 trillion won, outpacing banks and financial holding companies.

Understanding Capital Securities

Capital securities, recognized under financial regulations, serve as a critical tool for institutions to meet capital requirements and bolster financial health. They are categorized into hybrid securities, offering perpetual bonds with discretionary dividends, and subordinated bonds, featuring mandatory interest payments and a minimum five-year maturity.

The Perils of Early Redemption

The customary practice of early redemption, while initially appealing, poses significant refinancing risks. Financial companies face the daunting challenge of managing repeated call options or securing new issuances, a scenario that could exacerbate under unfavorable funding conditions or deteriorating financial health.

A Case in Point

The recent hiccup with Lotte Insurance's delayed subordinated bond call option execution underscores the complexities and regulatory hurdles surrounding capital securities. This incident has ignited discussions on the necessity for systemic reforms and a shift towards common stock for capital expansion.