Bank of Korea Prepares to Inject Liquidity... Expands Eligible Collateral Securities Range (Comprehensive)

Meeting of the Financial Monetary Committee on the 12th
Establishing a Foundation for Expanding Liquidity in Preparation for Emergency Situations

Bank of Korea Governor Lee Ju-yeol is striking the gavel at the Monetary Policy Committee meeting held on the 27th at the Bank of Korea headquarters on Sejong-daero, Jung-gu, Seoul. The Bank of Korea decided to keep the base interest rate unchanged at 1.25% during the meeting. / Photo by Moon Honam (Photo provided by Bank of Korea)

[Asia Economy Reporter Jang Sehee] The Monetary Policy Committee of the Bank of Korea has decided to expand the eligible collateral securities that banks must provide when borrowing from the Bank of Korea starting next month on the 1st. Additionally, a repurchase agreement (RP) purchase test targeting non-bank institutions will be conducted next week. This measure was taken to establish a foundation for expanding liquidity in preparation for emergency situations amid growing instability in domestic and international financial markets. Market expectations suggest that the Bank of Korea will not convene an emergency Monetary Policy Committee meeting for interest rate decisions within this month.

On the 12th, the Bank of Korea decided to newly include industrial finance bonds, small and medium enterprise finance bonds, export-import finance bonds, and mortgage-backed securities (MBS) issued by the Korea Housing Finance Corporation as eligible collateral securities for loans. The scale of newly recognized eligible collateral securities held by banks is estimated to be about 100 trillion won as of the end of last month.

The Bank of Korea explained, "The expansion of eligible collateral securities for loans has the effect of strengthening the foundation for smoothly supplying liquidity to banks through loans from the Bank of Korea when necessary." The Bank of Korea expects this measure to ease the burden on banks in providing collateral for loans from the Bank of Korea and to help improve bank profitability. Furthermore, it is anticipated to contribute to improving the bond issuance conditions of the Korea Development Bank, Industrial Bank of Korea, Export-Import Bank of Korea, and Korea Housing Finance Corporation.

The Bank of Korea plans to conduct an RP purchase test as early as next week in preparation for a potential deterioration in financial markets. With increased volatility marked by sharp fluctuations in the stock and foreign exchange markets, the intention is to supply liquidity to the market through RP purchases. A Bank of Korea official stated, "If the financial market worsens, it will be necessary to supply liquidity extensively to securities firms and securities finance companies, so we plan to set a certain amount related to this and conduct actual transactions," adding, "The test will be implemented as early as next week."

However, there are opinions that direct liquidity supply may have limited actual effects. Yoon Yeosam, an analyst at Meritz Securities, said, "Simply injecting funds in the short term will have very limited scalability," and added, "In a market that has already developed resistance, such policies will not be sufficient to defend the prices of risky assets."

Before the start of the Monetary Policy Committee meeting, the Bank of Korea announced in advance that the meeting was not for interest rate decisions. The Bank of Korea stated, "There are no agenda items related to monetary policy direction on today's Monetary Policy Committee." This appears to be aimed at blocking market expectations for an emergency rate cut through a temporary Monetary Policy Committee meeting. On the same day, Daishin Securities assessed that the possibility of the Bank of Korea convening an emergency Monetary Policy Committee to implement an urgent base rate cut is limited.

This content was produced with the assistance of AI translation services.