Bank of Korea considered direct purchase of CP and corporate bonds but...

"Central Banks Find It Difficult to Bear Risk Directly"
"Deciding to Support Specific Companies Is Overreach... Indirect Support Is Possible"

▲Korea Institute of Finance 'Capital Market Risk Factors and Countermeasures Due to COVID-19' Report

[Asia Economy Reporter Kim Eun-byeol] Concerns about credit crunches among companies are growing due to the impact of the novel coronavirus infection (COVID-19), but it has been judged difficult for the Bank of Korea to directly purchase risky assets such as commercial papers (CP) or corporate bonds. The Bank of Korea maintains that indirect financial support, as in the past, is fully possible, but it is not easy for the central bank to directly bear the risk burden.

According to the Bank of Korea on the 23rd, officials recently reviewed whether it is possible to purchase CP or corporate bonds under the Bank of Korea Act as the bond market showed signs of instability. According to Article 68, Paragraph 1 of the Bank of Korea Act, the assets that the Bank of Korea can purchase are government bonds, government-guaranteed bonds, and securities designated by the Monetary Policy Committee. Therefore, it is possible to interpret that, with the resolution of the Monetary Policy Committee, risky assets such as CP and money market funds (MMF) can also be purchased. When the Bank of Korea Act was amended in 1997, the Ministry of Finance and Economy stated in the legislative notice that "if deemed necessary, corporate bonds or CP can be bought and sold, enabling flexible monetary control." The amendment at that time considered the trading of corporate bonds and CP. In the market, expectations grew that the Bank of Korea should take a magnanimous stance since the damage caused by COVID-19 is more severe than during the 2008 financial crisis.

However, concerns about stability and liquidity ultimately held back the move. Article 68, Paragraph 2 of the Bank of Korea Act adds a proviso that "each of the securities must be freely tradable and fully comply with issuance conditions." A Bank of Korea official explained, "Paragraph 2 is interpreted to mean 'securities with absolutely no risk,'" and the review concluded that due to Paragraph 2, it is difficult for the Bank of Korea to directly purchase CP or corporate bonds.

Therefore, the market is left waiting only for the decision on the target assets of the bond stabilization fund. The size of the bond stabilization fund is reported to be at least 10 trillion won plus alpha (α), but experts agree that the fund is insufficient. Yoon Won-tae, a researcher at SK Securities, said, "The amount of corporate bonds maturing before June is 2.5 trillion won, and CP and short-term bonds amount to about 25 trillion won, totaling 28 trillion won. Even conservatively assuming that 50% will not be repaid, the bond stabilization fund should be roughly over 15 trillion won for the market to feel reassured."

The Bank of Korea's position is that additional support is possible as long as it does not involve direct funding to companies. This is similar to the situation in 2016 when the government and the Bank of Korea prepared funds for industrial restructuring in sectors such as shipbuilding. At that time, the political circles also demanded that the Bank of Korea provide direct financial support, but the Bank of Korea insisted that fund preparation was possible only with government guarantees. An industry official said, "Ultimately, the issue is who will bear the losses if the worst-case scenario occurs," adding, "It should be remembered that in the case of the U.S. Federal Reserve (Fed), the government agreed to provide guarantees when purchasing CP."

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