"Prevent Chain Bankruptcies"... BOK's Deliberation on 'Korean-Style Quantitative Easing'

Persistent Financial Instability Despite Global Liquidity Expansion
Focus on Remaining Measures to Support Companies and Prevent Financial Institution Insolvency

[Asia Economy Reporters Eunbyeol Kim and Sehee Jang] "Central banks are running out of cards to play; now is the time to focus on preventing companies severely impacted by the novel coronavirus disease (COVID-19) from collapsing."

This is the diagnosis from experts regarding the unstable financial markets despite global central banks?including those of the United States, Europe, Japan, South Korea, and China?coordinating liquidity support. Although monetary policy coordination was implemented to reduce market anxiety and provide emergency measures, it was insufficient to eliminate the fundamental fear caused by COVID-19. Since central banks have already taken basic measures, the prevailing advice is that the remaining options should be used to support failing companies and prevent financial institution insolvencies.

◆ "Remaining ammunition should focus on corporate support and defending against financial institution insolvency" = On the 17th, Professor Jeongsik Kim of Yonsei University’s Department of Economics said in a phone interview with Asia Economy, "Normally, lowering interest rates is expected to boost the economy through two channels: increased consumption and investment, or increased lending. But now, since COVID-19 is the cause, the situation is different," adding, "Even if interest rates are lowered and fiscal policies are implemented, people remain anxious and do not go out, so the effect is limited."

He continued, "Countries worldwide are closing their borders, and over 140 countries have imposed entry bans, so even if interest rates fall, companies are unlikely to invest," adding, "The Bank of Korea is well aware of the limitations of stimulating the economy through interest rate cuts." Professor Inho Lee of Seoul National University’s Department of Economics also said, "Even if money is injected, transactions in the real economy are not occurring," and "It will be difficult to expect immediate effects from policy mix (policy coordination)."

The difficulty in seeing immediate effects from interest rate cuts was also acknowledged by Bank of Korea Governor Juyeol Lee, who implemented an emergency rate cut the previous day. Governor Lee said, "There seems to be a perception that monetary policy has limitations during a health crisis, which is why financial markets are shaking," and "Once the spread of COVID-19 somewhat subsides, the effects of interest rate policy will appear with a time lag." Ultimately, while immediate effects cannot be guaranteed, the rate cut is interpreted as aiming to reduce the interest burden on self-employed individuals and small businesses to prevent bankruptcies and stabilize financial markets to some extent. A senior official at the Bank of Korea explained, "Conversely, the fact that the market is plunging even after such a rate cut means it would have been more severe if the rates had not been lowered."

On the 16th, after the temporary Monetary Policy Committee meeting was held at the Bank of Korea in Jung-gu, Seoul, a press conference by Lee Ju-yeol, Governor of the Bank of Korea, is being live-streamed online.
[Image source=Yonhap News]

◆ Possibility of additional rate cuts and Korean-style quantitative easing? = The market expects that the Bank of Korea may cut interest rates once more. Oxford Economics predicted, "The Bank of Korea is likely to cut rates by an additional 0.25 percentage points within the second quarter, lowering the rate to 0.50% annually." Since South Korea is not a key currency country, there is a lower bound on effective interest rates, so rates cannot be lowered indefinitely. However, the U.S. Federal Reserve’s reduction of rates to 0% has somewhat lowered South Korea’s effective lower bound, which is a positive factor.

Additionally, the Bank of Korea is currently considering "all cards allowed under the Bank of Korea Act." The most prioritized option appears to be so-called "Korean-style quantitative easing." If the COVID-19 crisis prolongs, the impact will eventually spread from the real economy to the financial sector, increasing loan demand and potentially causing financial institution insolvencies. To prevent this, a fund would be established to provide support. This could involve the Bank of Korea providing funds to establish a bond market stabilization fund that purchases corporate bonds, installment finance bonds, and bank bonds (as in 2008), or supporting capital increases for banks through cooperation with the Korea Development Bank and others (as in 2009). However, since commercial banks currently maintain a high BIS (Bank for International Settlements) capital adequacy ratio of around 16%, the situation will be monitored further before measures are implemented.

Professor Jeongsik Kim said, "Typically, quantitative easing involves purchasing government bonds to supply liquidity when the benchmark interest rate falls to around 0%. Although our rates are not at 0%, we can proactively consider purchasing corporate bonds to supply liquidity to companies and stabilize the market." This means considering ways to prevent companies from becoming insolvent due to liquidity shortages. Additionally, Professor Kim suggested temporarily relaxing loan regulations at the government level as another idea. He clarified, "This is not about relaxing real estate loan regulations," but rather "considering easing regulations on loans for companies, small businesses, and self-employed individuals to supply short-term liquidity."

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