Bank of Korea Provides 24 Trillion Won + α Liquidity Injection

Equivalent to total liquidity supply during the financial crisis
Additional liquidity supply possible depending on market conditions
Half of government measures, liquidity support by the Bank of Korea

[Asia Economy Reporters Eunbyeol Kim and Haeyoung Kwon] As criticism mounts that the Bank of Korea (BOK) should take a more proactive stance to mitigate the shock caused by the novel coronavirus disease (COVID-19), the BOK is showing reluctance. This is because the amount of money already planned to be injected matches the liquidity supply during the 2008 financial crisis, and if the central bank directly undertakes loans that could incur losses, it could spark controversy over the abuse of its note-issuing power. Similar to the United States, to implement unprecedented quantitative easing, it is pointed out that not only the government but also public consensus on unlimited quantitative easing is necessary.

According to the government and the BOK on the 25th, the financial sector is discussing detailed support plans for the Bond Stabilization Fund and the Securities Stabilization Fund, with plans to finalize the details within this week. The Bond Stabilization Fund and Securities Stabilization Fund are composed of KRW 20 trillion and KRW 10.7 trillion respectively, with the BOK expected to supply liquidity amounting to about half (approximately KRW 15 trillion). The most likely method of liquidity supply is the BOK lending funds to financial institutions participating in the funds. It is anticipated that the BOK will either purchase Korea Development Bank bonds or buy repurchase agreements (RPs) issued as collateral. Additionally, the BOK has introduced measures including ▲purchase of securities firms’ RPs (KRW 2.5 trillion) ▲simple purchase of government bonds (KRW 1.5 trillion) ▲expansion of financial intermediation support loans (KRW 5 trillion). The simple sum of these measures reaches the KRW 24 trillion range, comparable to the total supply by the BOK (about KRW 27 trillion) after the Lehman Brothers crisis.

Nevertheless, financial institutions criticize the BOK for not taking a more active role. The issue lies in risk burden. Although the BOK lends money to financial institutions, all such loans must be collateralized. While the scope of bonds acceptable as collateral has been expanded, the principle of “only collateralized loans” remains unchanged. In a situation where loan defaults and bad debt costs are expected to increase due to COVID-19, commercial banks, which must inject additional capital, inevitably face burdens. Ultimately, if the soundness of banks deteriorates, it leads to increased funding costs and other issues.

The BOK understands the burden on commercial banks but maintains the position that the central bank cannot bear losses. A BOK official said, “There is no case anywhere in the world where a central bank makes loans that could result in principal losses.” This is why the BOK recently explained the Federal Reserve’s quantitative easing measures in detail through its New York office. At first glance, it seems that the Fed directly purchases corporate bonds, but it establishes a special purpose vehicle (SPV) as an intermediary, into which the government injects guarantee funds. If the SPV incurs losses from purchasing risky corporate bonds, the losses are deducted from the government guarantee funds.

Ultimately, it is pointed out that for “unprecedented measures” to be introduced, the government must clarify how much loss it is willing to bear. A commercial bank official said, “Economic agents such as the government, banks, and the BOK must be prepared to share risks and accept losses together.” A BOK official added, “We hope the National Assembly will also examine what kind of system is necessary for the BOK to provide unprecedented support.”

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