KDB and IBK to launch KRW 1 trillion in KOFR-based loan products; government says KOFR expansion is on track

[Financial News] Korea Development Bank (KDB) and Industrial Bank of Korea will each launch loan products worth KRW 500 billion using KOFR (Korea Overnight Financing Repo Rate, or Kopa), a risk-free benchmark rate. The government is working to expand the use of KOFR as a new short-term benchmark rate to replace the certificate of deposit (CD) rate.
The Financial Services Commission and the Financial Supervisory Service said on the 26th that KOFR-based transactions accounted for 12.1% of interest rate swap transactions in the financial sector during the year from July last year through June this year. This exceeded the government’s initial target of 10%. The financial authorities set target shares for KOFR-based transactions at 10% for the first year (July last year through June this year) and 25% for the second year (July this year through June next year). They plan to raise the target by 15 percentage points each year, expanding it to at least 70% by June 2030.
The share of KOFR-based transactions rose to 18.5% (provisional) in the third quarter (July–September) of this year. From January through September this year, the banking sector also issued KRW 20.5 trillion in KOFR-based floating-rate notes (FRNs), provisionally accounting for 32.3% of total FRN issuance. The government plans to gradually increase this share as well, to at least 50% by June 2031.
KDB and IBK will launch KOFR-based corporate loan products on the 26th, each worth KRW 500 billion and totaling KRW 1 trillion, as part of efforts to broaden the use of KOFR. The move is intended to extend the use of KOFR to the loan market. The Korean Federation of Banks also revised its “Best Practice Guidelines for Loan Interest Rates” last June to include KOFR among loan benchmark rates, facilitating the launch of KOFR-based loan products. The Korea Securities Depository has also been publishing additional average KOFR rates for the most recent 30, 90 and 180 days since last August.
South Korea’s financial market is currently in a transition period, shifting from CD rates, COFIX (Cost of Funds Index), call rates and KORIBOR toward a KOFR-centered system. After the London Interbank Offered Rate (LIBOR) manipulation scandal that rocked global financial markets in 2012, international financial institutions pointed to the vulnerabilities of quote-based rates and recommended a shift to transaction-based risk-free benchmark rates. In line with this, the government has been working since November 2021 to formally publish and adopt KOFR in order to establish a benchmark rate that meets global standards.
[email protected] Jo Eun-hyo Reporter