The Bank of Korea Expands Financial Institutions' Collateral Capacity by 10 Trillion Won... Settlement Collateral Ratio Reduced from 70% to 50%

[Asia Economy Reporter Kim Eunbyeol] The Bank of Korea (BOK) has decided to lower the collateral securities ratio required from financial institutions for net settlement. The range of collateral securities that financial institutions can deposit with the BOK has also been expanded. This measure was introduced by the BOK to ensure the timely operation of the 'Livelihood and Financial Stability Package Program' aimed at overcoming the damage caused by the novel coronavirus disease (COVID-19).

On the 1st, the BOK announced, "The collateral securities provision ratio to guarantee settlement performance in net settlement between financial institutions will be reduced from the existing 70% to 50," and added, "The plan to raise the collateral securities provision ratio to 100% by August 2022 will also be postponed."

Currently, small payment systems such as internet banking and interbank transfers operate on a prepayment basis, where the recipient's account is credited immediately once the remitter applies for a fund transfer. However, interbank settlements are conducted using a 'deferred net settlement' method, completed by 11 a.m. on the next business day. While customers receiving funds can immediately withdraw transferred funds under the prepayment method, the transaction banks bear credit risk as they cannot recover the funds paid to recipients until the net settlement time. To reduce the risk associated with deferred interbank settlements, the BOK requires banks to provide collateral securities equivalent to a certain percentage of their daily net transfer limits.

The collateral deposit ratio for banks' net settlements was about 30% until 2015, increased to 50% in 2016, and further raised to 70% in August last year. It was scheduled to rise to 80% starting August this year. Initially, the BOK planned to increase the collateral securities provision ratio by 10 percentage points annually until reaching 100% by August 2022. However, the schedule has been sequentially postponed, delaying the 100% collateral securities provision ratio implementation to August 2024.

Hong Cheol, head of the Settlement Policy Team at the BOK's Financial Settlement Department, stated, "This measure will reduce the amount of collateral securities that financial institutions must deposit with the BOK from 35.5 trillion won to 25.4 trillion won, a decrease of about 10.1 trillion won," adding, "This amount of liquidity will be supplied to the financial market." He explained that financial institutions will not need to purchase collateral bonds intentionally to meet the BOK's collateral deposit ratio and can use their existing bonds to raise funds, thereby supplying liquidity to the market.

Hong added, "Until now, the trend was to continuously increase the net settlement collateral deposit ratio. This is the first time the ratio has been lowered." The adjustment of the net settlement collateral deposit ratio is planned to be implemented from the 10th, following approval at the regular Monetary Policy Committee meeting on the 9th.

Additionally, the BOK has decided to temporarily include public institution-issued bonds (9 types) and bank bonds as eligible collateral securities for net settlement. These include bonds issued by Korea Electric Power Corporation, Korea Expressway Corporation, Korea Gas Corporation, Korea Land and Housing Corporation, Korea Railroad Corporation, Korea Rail Network Authority, Korea Water Resources Corporation, Small and Medium Business Corporation, and the Deposit Insurance Corporation, as well as agricultural finance bonds, fisheries finance bonds, and general bank bonds.

The BOK explained that if financial institutions participating in net settlement fail to repay their debts, the bonds deposited by the respective banks will be used as loan collateral.

Hong said, "This measure will ease the burden on financial institutions in procuring eligible collateral securities," and added, "The BOK has previously expanded the range of eligible collateral securities for net settlement to alleviate the collateral burden on financial institutions." The expansion of eligible collateral securities is scheduled to be implemented in May after system changes and testing.

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