Government to Inject 41.8 Trillion Won into Financial Market Stability, Including 20 Trillion Won from Chaean Fund

[Asia Economy Reporter Kim Hyo-jin] The government has decided to support funds and capital amounting to 41.8 trillion won to address instability factors in financial markets such as the stock market, corporate bond market, and short-term money market amid the spread of the novel coronavirus infection (COVID-19).

Financial Services Commission Chairman Eun Sung-soo announced this COVID-19 related financial market stabilization plan on the 24th at the Government Seoul Office.

The government plans to establish a 20 trillion won Bond Market Stabilization Fund (Bond Stabilization Fund) to prevent the shock from the global financial market caused by COVID-19 from spreading to tightening in the corporate bond market and others. The Bond Stabilization Fund aims to alleviate market instability by providing liquidity support to companies.

The government had previously considered operating a Bond Stabilization Fund of at least 10 trillion won. The plan is to first operate with 10 trillion won and then quickly raise an additional 10 trillion won.

The Bond Stabilization Fund will be established through joint investment by financial institutions, mainly banks. Considering liquidity issues of the investing financial companies, the first capital call (payment of funds upon confirmation of investment targets and actual investment execution) is expected to be around 3 trillion won. The investment targets include corporate bonds, high-quality commercial papers (CP), and financial bonds. Purchases are expected to begin early next month.

The government created a 10 trillion won Bond Stabilization Fund during the 2008 global financial crisis. From December of that year to December 2011, a total of 5 trillion won was executed through capital calls.

Additionally, the government will support 4.1 trillion won to facilitate smooth corporate bond issuance. For mid-sized and large companies facing difficulties in bond conversion, a rapid corporate bond underwriting system worth up to 2.2 trillion won will be implemented.

Each company will repay 20% of the maturing amount on its own, and the remaining 80% will be underwritten by the Korea Development Bank (KDB). KDB will then sell the underwritten portion to bond banks and the Korea Credit Guarantee Fund.

Separately, KDB will directly purchase 1.9 trillion won worth of corporate bond refinancing issuances. The targets are companies rated A or higher, or those downgraded due to COVID-19 but still investment grade or above.

Including the previously planned 6.7 trillion won Primary Collateralized Bond Obligation (P-CBO) program, a total of 10.8 trillion won will be supplied in the corporate bond issuance market.

P-CBO is a system that supports companies with low credit ratings that find it difficult to directly issue corporate bonds by securitizing newly issued bonds as underlying assets, enabling companies to raise funds at low interest rates in the direct finance market.

The government will also invest 7 trillion won to stabilize the short-term money market such as CP. Approximately 2.5 trillion won of liquidity will be supplied through securities finance loans, and about 2.5 trillion won through the Bank of Korea’s repurchase agreement (RP) purchases.

Even before the Bond Stabilization Fund support, KDB and Industrial Bank of Korea will pre-purchase about 2 trillion won worth of CP and short-term bonds.

Regarding instability in the securities market, a 10.7 trillion won Securities Market Stabilization Fund (Securities Stabilization Fund) will be established. It will be created jointly by the five major financial holding companies, 18 key financial companies from various sectors within finance, and securities-related institutions such as the Korea Exchange.

Funds will be raised through capital calls and invested not in individual stocks but in index products representing the entire securities market, such as the KOSPI 200. The first capital call is expected to be around 3 trillion won, similar to the Bond Stabilization Fund, considering the liquidity of financial companies.

The government will also ease prudential regulations (risk-weighted ratios) on financial companies’ fund investments and consider tax support measures to reduce investment loss risks.

There are also plans to expand tax support measures to broaden the demand base for the stock market, such as including stocks as investment targets in Individual Savings Accounts (ISA) and expanding eligibility from 'those with income' to 'residents.'

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