Bank of Korea 'Corporate Bond Purchases' Passed to National Assembly... National Assembly Says "After the General Election"

The Bank of Korea: "Prioritizing Market Monitoring of Bond Market Stabilization Fund and Securities Market Stabilization Fund"

[Image source=Yonhap News]

[Asia Economy Reporter Jang Sehee] As the Bank of Korea has unveiled an unlimited repurchase agreement (RP) purchase card to leverage the effect of a 'Big cut' in the base interest rate, voices are emerging that direct purchases of corporate bonds are also necessary. However, for the government to provide payment guarantees on corporate bonds, parliamentary approval is required, and with the April general election imminent and everyone rushing into the election campaign, it is realistically expected that legal amendments will be difficult.

According to the National Assembly on the 27th, opinions on the amendment of the Bank of Korea Act are sharply divided not only among parties but also among individual lawmakers, and with the general election approaching, the prospects for actual legal amendments are uncertain. The direct purchase of corporate bonds or commercial papers (CP) by the Bank of Korea or including them in the securities subject to open market operations is blocked by Article 68 of the Bank of Korea Act, requiring parliamentary amendment. Articles 75 and 76 of the Bank of Korea Act clearly stipulate that the Bank's loans and securities purchases are limited to government bonds and government-guaranteed bonds.

Kim Jong-seok, a member of the United Future Party, said, "It will take a lot of time to amend the law, and I believe there will be no practical benefit in the current situation." Another National Assembly official emphasized, "Given the special situation ahead of the election, legal amendments are practically difficult. Even if attempted, it takes time, so it is questionable how much effect it can have on the market."

Choi Un-yeol, head of the Financial Stability Task Force (TF) of the Democratic Party of Korea, said, "Since defaults on corporate bonds or CPs could become a reality, safeguards like the U.S. Commercial Paper Funding Facility (CPFF) are necessary."

The Bank of Korea also takes a cautious stance on purchasing corporate bonds. Deputy Governor Yoon Myeon-sik stated on the 26th, "Government payment guarantees on corporate bonds require parliamentary approval, and whether a national consensus can be formed on this matter is a separate issue." He expressed doubts about whether the public can agree on the central bank executing funds to buy distressed specific corporate bonds or CPs.

Since amending the Bank of Korea Act is seen as difficult even in the National Assembly, the Bank plans to prioritize monitoring the full-scale market release of the Bond Market Stabilization Fund and Securities Market Stabilization Fund next week.

A Bank of Korea official said, "The first response is to use the Bond Market Stabilization Fund and others scheduled to be activated from next week." He added, "Depending on the consent of the National Assembly, government, and the public, we need to consider whether the Bank of Korea must mobilize its note-issuing power."

Experts still say that purchasing corporate bonds and CPs through funds is indirect and lacks effectiveness. Professor Ahn Dong-hyun of Seoul National University's Department of Economics pointed out, "Direct purchase of corporate bonds by the Bank of Korea would be more effective. Even if liquidity is supplied without limit, only about 20-30% of that money actually reaches households or companies out of the total 100%."

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