South Korean securities firms are facing increased scrutiny over potential liquidity risks as the volume of short-term debt issuance, particularly in the form of commercial paper (CP) and asset-backed securities (ABS), continues to rise. The growing reliance on these instruments, coupled with a widening gap between short-term funding and long-term asset maturities, is prompting credit rating agencies to assess the potential for instability within the sector.
Korea Credit Ratings (KCR) plans to include an analysis of “asset-liability maturity mismatch” in its upcoming annual reports on securities companies, slated for release in April. According to KCR, the increasing importance of CP issuance necessitates a more detailed examination of the maturity structure of assets and liabilities held by these firms. This move signals a growing concern among rating agencies regarding the potential for liquidity strains should short-term funding markets tighten.
CP, a form of short-term unsecured debt, has become a popular funding source for securities firms, allowing them to access capital at relatively low costs. As of the end of last year, outstanding CP totaled approximately 48.5 trillion won, a significant increase of 7 trillion won over the previous year. This growth is driven by investor appetite for higher yields compared to traditional bank deposits, as well as the firms’ need to fund investments.
However, the pursuit of profitability can lead to a mismatch between the maturity of assets and liabilities. Securities firms often invest a portion of the funds raised through CP in longer-term assets, such as bonds with maturities ranging from 5 to 30 years. While this strategy can enhance returns, it exposes firms to liquidity risk if they are unable to roll over their short-term debt or access alternative funding sources. A sudden disruption in the short-term funding market could force firms to sell long-term assets at unfavorable prices to meet their obligations.
This concern was highlighted in October of last year when Moody’s downgraded the credit rating of Korea Investment & Securities, the issuer of the largest volume of CP (18 trillion won as of 2025.6). The downgrade underscored the agency’s assessment of the risks associated with the firm’s reliance on short-term funding and its exposure to potential refinancing challenges. KCR’s forthcoming analysis is a direct response to these growing concerns.
Data from the Korea Financial Research Institute indicates that short-term funding – debt with maturities of less than one year – now accounts for 86.2% of the total funding sources for domestic securities firms, an increase of 11 percentage points compared to a decade ago. This trend reflects a broader shift towards greater reliance on short-term debt markets.
The government has actively encouraged securities firms to invest in “venture capital” – or what is being termed “adventure capital” – and has expanded the number of firms authorized to issue CP. Currently, seven firms are permitted to issue CP, with three receiving approval under the current administration and two more applications pending. In November of last year, the government granted two securities firms with capital bases exceeding 8 trillion won the authority to offer comprehensive investment accounts (IMA), a product with a two-year maturity. While longer than CP, these accounts still present maturity mismatch risks given the firms’ investment strategies.
Financial regulators are aware of these risks and are taking steps to mitigate them. While setting a 25% limit on the proportion of funds that securities firms can invest in venture capital, the authorities have also provided flexibility in how this limit is met. For example, if a firm raises 100 million won through CP and IMA, It’s not required to invest exactly 25 million won in venture capital. Instead, it can include other forms of funding to reach the 25 million won threshold. This approach aims to balance the need for regulatory oversight with the firms’ operational flexibility.
A senior official at the Financial Supervisory Service (FSS) emphasized the need to enhance both liquidity management and capital regulation in response to the evolving business landscape of securities firms. The FSS plans to refine regulations governing liquidity coverage ratios and the net capital requirement (NCR), a measure of a firm’s ability to absorb losses, to ensure they adequately address the risks associated with short-term funding and long-term asset investments. The goal is to create a more resilient financial system capable of withstanding potential shocks in the short-term funding market.
The situation highlights a delicate balancing act for South Korean securities firms: capitalizing on opportunities in the debt market while managing the inherent risks associated with maturity mismatches and potential liquidity constraints. The increased scrutiny from credit rating agencies and the proactive measures being taken by regulators suggest a heightened awareness of these challenges and a commitment to maintaining financial stability.
