Korean banks and policy financial institutions face diverging incentives two weeks into administrative guidance requiring the transition of floating rate note (FRN) reference rates from certificate of deposit (CD) rates to the Korea Overnight Financing Repo Rate (KOFR). Banks benefit from lower funding costs under KOFR, which typically trades below CD rates due to its risk-free benchmark status, while institutional investors continue to favor CD-linked products that currently offer approximately 0.2 percentage points higher interest. The lower funding costs achieved through KOFR adoption could reduce household and corporate loan rates over the medium to long term, yet the immediate rate disadvantage is slowing investor demand and creating uneven adoption speeds across institutions.
Policy Financial Institutions Lead KOFR Adoption with 32.5% Issuance Share
Data compiled by Yonhap Infomax on won-denominated FRN issuance by 20 banks and policy financial institutions subject to the administrative guidance showed KOFR-referenced issuance totaled 15.29 trillion won out of 47.09 trillion won in total issuance, representing approximately 32.5%. The first-year target stands at 10% for general banks and 25% for policy financial institutions. The Financial Supervisory Service plans to raise KOFR issuance targets by 10 percentage points annually, reaching 50% for general banks and 65% for policy financial institutions by June 2031.
Policy financial institutions accounted for approximately three-quarters of KOFR FRN issuance. The Industrial Bank of Korea achieved a 57% KOFR ratio, the Export-Import Bank of Korea reached 53.2%, and the Industrial Bank of Korea posted 46.9%, with combined issuance of 11.48 trillion won. Excluding these three institutions, general banks' KOFR ratio drops to 15.9%.
Woori Bank Tops General Banks with 54.6% KOFR FRN Ratio
Woori Bank led general banks with six KOFR FRN issuances totaling 1.61 trillion won, achieving a 54.6% ratio. All three issuances (900 billion won) conducted after the administrative guidance took effect this month were KOFR-based. Hana Bank followed at 22.3%, Shinhan Bank at 16.6%, BNK Busan Bank at 13.2%, iM Bank at 12.9%, KB Kookmin Bank at 12.0%, and BNK Kyongnam Bank at 11.4%—all exceeding the first-year 10% target.
Nonghyup Bank recorded a 5.9% KOFR ratio, falling short of the 10% target. The bank issued only CD-linked FRNs (740 billion won) this month. Five banks—SC First Bank, Gwangju Bank, Jeonbuk Bank, Jeju Bank, and Sh Suhyup Bank—had no KOFR FRN issuance this year. Korea Citibank and three internet-only banks (Kakao Bank, K bank, Toss Bank) had no FRN issuance at all.
Rate Differential Drives Investor Preference for CD-Linked Products
The divergence stems from conflicting interests between banks and investors, alongside system readiness gaps. KOFR, as a risk-free benchmark, typically trades below CD rates, which incorporate bank credit risk. CD FRNs issued by banks this month carried surface rates of approximately 3%, while KOFR FRNs showed rates around 2.8%.
Banks have been offering spreads of around 40 basis points on KOFR products, more than 10 basis points above the 20 basis points offered on CD products. Despite higher spreads, investors continue to prefer CD products due to their higher surface rates. A treasury department official at a bank stated that regional banks without issuance are mostly in internal preparation stages, and while a single issuance could meet the 10% target given small FRN volumes, reaching 50% requires investor inflows.
Market participants view the Monetary Policy Committee meeting on the 16th as a potential turning point. Unlike CD rates, which have priced in rate hike expectations, KOFR immediately reflects base rate changes, potentially narrowing the gap between the two benchmarks if the base rate rises.
Financial Authorities Target KOFR as Unified Benchmark for Funding and Lending
Financial authorities are pursuing the transition to establish KOFR as a comprehensive benchmark for both funding and lending. If KOFR-based funding translates into actual cost savings, it could exert downward pressure on lending rates over the medium to long term. Household and corporate loan rates are primarily determined by adding spreads to COFIX (Cost of Funds Index) or financial bond rates. Substantive effects require the introduction of KOFR-linked loans. Under the benchmark rate reform plan, the Financial Services Commission directed the Industrial Bank of Korea and the Industrial Bank of Korea to each supply 500 billion won in KOFR-based loans—totaling 1 trillion won—to regional enterprises, small and medium-sized enterprises, and small business owners in the second half of the year.
FAQ
What is the current KOFR adoption rate among Korean banks' floating rate note issuances?
As of the data compiled, KOFR-referenced issuance totaled 15.29 trillion won out of 47.09 trillion won in total FRN issuance by 20 banks and policy financial institutions, representing approximately 32.5%. Policy financial institutions accounted for approximately three-quarters of KOFR FRN issuance, while general banks' KOFR ratio stood at 15.9% excluding the three major policy institutions.
Why do investors prefer CD-linked FRNs over KOFR-linked products despite higher spreads on KOFR products?
Investors favor CD-linked FRNs because they offer higher surface rates—approximately 3% compared to KOFR FRNs at around 2.8%. Although banks offer spreads of around 40 basis points on KOFR products versus 20 basis points on CD products, the absolute surface rate investors receive remains higher on CD-linked products due to KOFR's lower baseline as a risk-free benchmark.
What are the financial authorities' targets for KOFR adoption in bank FRN issuances?
The Financial Supervisory Service set first-year targets at 10% for general banks and 25% for policy financial institutions. The authorities plan to raise KOFR issuance targets by 10 percentage points annually, aiming to reach 50% for general banks and 65% for policy financial institutions by June 2031.
