The Bank of Korea and financial regulators are expanding the use of the Korea Overnight Financing Repo Rate (KOFR), the country's risk-free benchmark rate, into the loan market. Korea Development Bank and Industrial Bank of Korea will begin offering KOFR-based corporate loans on the 26th, each supplying 500 billion won for a combined 1 trillion won. Household lending, however, still requires further discussion, as the rate structure is difficult for consumers to grasp and banks face a heavier burden in handling such products.
The central bank, the Financial Services Commission and the Financial Supervisory Service announced progress and future plans for the benchmark rate overhaul on the 25th. The two banks' loan products will use the 30-day average KOFR as their base rate. KDB will apply a preferential rate of up to 0.65 percentage points for small and mid-sized companies, with an additional 0.05 percentage point for firms based in or relocating to provincial areas. Industrial Bank of Korea will lend to small businesses in need of emergency working capital and offer up to 0.3 percentage points in preferential rates for provincially based firms. Loan terms run up to one year.
KOFR is calculated from rates on overnight repurchase agreement transactions backed by government bonds and monetary stabilization bonds. Unlike certificate of deposit rates, which reflect banks' funding costs, KOFR is less affected by individual banks' funding conditions. Even if CD rates jump because a particular bank's credit risk rises, KOFR-based lending rates can remain relatively insulated.
Extending the rate to household loans remains a challenge. "Household loans have long maturities and financial consumers find the KOFR concept hard to understand, so banks also feel burdened about handling these products," said Hwang Young-woong, a team head at the Bank of Korea. Some overseas research has found that lending rates declined, but with no domestic cases to draw on, the actual effect is uncertain. The central bank is weighing a plan to first build up corporate lending and then expand to household loans depending on market conditions.
KOFR use is also growing in the derivatives and bond markets. KOFR-based transactions accounted for a preliminary 18.5% of the interest rate swap market in the third quarter, and regulators plan to raise that to more than 70% by June 2030. Issuance of KOFR-based floating rate notes by banks and policy finance institutions reached 20.5 trillion won from January through September, or 32.3% of all FRN issuance.
Authorities are also moving to scale back use of existing benchmark rates. From April next year, regulators will in principle halt new lending based on the Koribor, and they plan to strip the CD rate of its designation as a critical benchmark under the financial benchmark law at the end of 2030. For COFIX, authorities will tighten reviews of its calculation framework and further consider whether to designate it a critical benchmark.