The Role of the Bank of Korea That Persists Despite 'Korean-Style Quantitative Easing'

Banks and Securities: "Ultimately, Borrowing Money and Loans Are the Responsibility of the Private Sector... Burden Remains"

[Image source=Yonhap News]

[Asia Economy Reporter Kim Eun-byeol] The Bank of Korea has finally pulled out the 'unlimited money supply' card. In order to mitigate the real and financial shocks caused by the novel coronavirus disease (COVID-19), the Bank of Korea decided to utilize its note-issuing power to inject money. Although this unprecedented response is called a 'Korean-style quantitative easing' measure, voices from the financial sector still demand a more proactive response from the Bank of Korea.

According to the financial sector on the 29th, the Bond Market Stabilization Fund, created based on the Bank of Korea's unlimited repurchase agreement (RP) purchases from the financial sector, will be launched from the 2nd of next month. The fund plans to stabilize the bond market through corporate bond purchases. Earlier, on the 26th, the Bank of Korea held a Monetary Policy Committee meeting and approved amendments to the 'Bank of Korea's Open Market Operation Regulations and Financial Institution Loan Regulations,' which include unlimited RP purchases and expansion of eligible institutions and securities for open market operations, to ensure the stable operation of such a fund.

Typically, the Bank of Korea conducted RP purchases as needed through resolutions by the Monetary Policy Committee, but from now on, it will open an RP purchase window every week and supply unlimited funds to financial institutions in need of liquidity. The interest rate ceiling is set at 0.85%, which is the base rate (annual 0.75%) plus 0.1 percentage points. The bidding method allocates the entire amount without limit. The bid rate will be separately announced each time.

Since this liquidity supply measure was not taken even during the foreign exchange crisis or financial crisis, the Bank of Korea named this measure 'Korean-style quantitative easing.' Deputy Governor Yoon Myeon-sik stated about the Bank of Korea's measure, "It is not far off to consider it quantitative easing." Quantitative easing refers to a method used by major advanced countries' central banks to supply money after lowering policy rates to zero (0) and having no room to lower rates further. It mainly involves purchasing government bonds or mortgage-backed securities (MBS) in specific amounts or periods to induce a sustained significant decline in long-term interest rates. Deputy Governor Yoon added, "In that sense, the Bank of Korea's full supply liquidity support system announced today differs somewhat in nature from the quantitative easing of other advanced central banks," but also said, "If one says that supplying the full demand according to market needs is de facto quantitative easing, it cannot be denied and is not largely incorrect." He also said, "After July, we will decide whether to extend the measure considering market conditions and bidding results."

[Image source=Yonhap News]

Nevertheless, voices from the financial sector call for a more proactive stance from the Bank of Korea. The government-led establishment of the Bond Market Stabilization Fund and the Securities Market Stabilization Fund involves financial institutions pooling funds, but the Bank of Korea is only playing the role of lending money to the financial sector, which is a source of dissatisfaction among private financial institutions.

An official from a commercial bank said, "Although the Bank of Korea has expanded the types of bonds it can accept as collateral, it is uncertain how many financial institutions will actually borrow money by pledging stable eligible bonds." Although the Bank of Korea expanded the eligible securities for RP purchases as collateral, there are doubts about how effective this will be in practice.

Even the Bank of Korea estimates the expanded scale of RP purchase targets and eligible securities to be about 70 trillion won but is not confident. Deputy Governor Yoon added, "It is still too early to judge how much money can be supplied through this measure." In other words, although the Bank of Korea declared it would lend unlimited money if the financial sector demands it, the burden ultimately falls on private financial institutions because they have to 'borrow' the money. Since the default risk arising after supplying funds to companies still must be borne by banks and securities firms, it is uncertain how actively they will supply funds to companies.

There are still claims in the market that the Bank of Korea should directly purchase corporate bonds and commercial papers (CP) without going through the Bond Market Stabilization Fund. However, the Bank of Korea maintains the position that it would be difficult if there are no eligible collateral securities for the bonds to be purchased. According to Articles 75 and 76 of the Bank of Korea Act, the Bank's lending and securities purchase targets are limited to government bonds and government-guaranteed bonds, and Article 68 explicitly excludes corporate bonds or CP from this.

Deputy Governor Yoon said, "If the government guarantees securities, I think it would be easier for the Monetary Policy Committee to decide on purchases," but added, "Government guarantees on corporate bonds require the consent of the National Assembly, and whether a national consensus can be formed on that matter is a separate issue." The U.S. Federal Reserve (Fed) purchases corporate bonds and CP by providing funds to special purpose vehicles funded by the government. If losses occur, the government’s capital contribution absorbs the losses first.

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