Bank of Korea's First Day of 'Unlimited Money Supply'... 5.25 Trillion Won Provided to Financial Sector (Comprehensive)

Repurchase Agreement (RP) Purchase Bidding
Banks and Securities Firms Bid 5.25 Trillion KRW, Fully Subscribed

[Image source=Yonhap News]

[Asia Economy Reporter Eunbyeol Kim] On the first day of the Bank of Korea's 'unlimited money supply' move, it supplied 5.25 trillion won to the financial sector. As unlimited funds will be supplied to the financial sector every week starting today, attention is focused on whether the financial market can stabilize.

On the 2nd, the Bank of Korea announced that it conducted a repurchase agreement (RP) purchase auction targeting banks and securities companies, and 5.25 trillion won was bid, deciding to supply the full amount of bids. An RP refers to a bond sold with the condition that it will be repurchased from the buyer after a certain period. The Bank of Korea uses RP transactions when injecting money into or withdrawing money from the market. When the Bank of Korea buys RPs from financial companies, it has the effect of releasing cash into the market. In return, financial companies must pledge collateral bonds to the Bank of Korea when the Bank of Korea buys RPs. It is easy to understand this as banks or securities companies entrusting bonds to the Bank of Korea and borrowing money. The RP maturity purchased by the Bank of Korea on this day was 91 days, and the interest rate was set at an annual 0.78%, 0.03 percentage points higher than the base rate (annual 0.75%).

Initially, the Bank of Korea expected about 3 trillion won to be bid for RP purchases on this day, but it supplied more funds to the financial sector than expected. The amount of funds supplied on this day is also larger than the RP purchases on the 19th of last month (1 trillion won) and the 24th of last month (2.5 trillion won). A Bank of Korea official said, "Since 3 trillion won of capital calls paid into the bond stabilization fund established by the government the day before will be injected through corporate bond purchases today, we expected the bid amount to exceed 3 trillion won," adding, "In addition to the bond stabilization fund injection, some financial companies seem to have requested funds for internal reasons." However, the official added, "Since RP purchases will continue to be conducted weekly, it is difficult to know whether requests for funds exceeding expectations will continue." It was reported that among the 5.25 trillion won supplied on this day, a larger portion was supplied to securities companies.

The Bank of Korea's unlimited liquidity supply measure was decided at the Monetary Policy Committee meeting on the 26th of last month. This measure, which was not taken even during the 1997 foreign exchange crisis or the 2008 financial crisis, will be implemented for the next three months. Since it is not significantly different from quantitative easing (QE) conducted by major central banks such as the United States, it has been evaluated as a 'Korean-style quantitative easing.'

The main reason for implementing the 'Korean-style quantitative easing' was to ensure the smooth operation of the bond stabilization fund established by the government to stabilize the corporate bond market. For the bond stabilization fund to purchase bonds released into the market, cooperation from the financial sector is essential. However, the financial sector is reluctant to supply funds due to concerns about deteriorating profitability caused by low interest rates and loan demand due to the novel coronavirus infection (COVID-19). For the money loosened by interest rate cuts to actually flow to customers, loans from commercial banks are essential, so this is also to reduce the burden on the banking sector. According to financial authorities on this day, the first capital call of 3 trillion won paid the day before after the establishment of the bond stabilization fund will be injected into corporate bond purchases today.

Meanwhile, the first foreign currency loan funds of 8.72 billion dollars using the Korea-US currency swap funds will also be actually released into the market today. Previously, the Bank of Korea conducted the first foreign currency loan auction for currency swap fund supply on the 31st of last month. The first supply limit was 12 billion dollars, but the bid amount was only 8.72 billion dollars. As currency swap funds are released through commercial banks, the won-dollar exchange rate started to rise this morning. At 9:08 a.m. in the Seoul foreign exchange market on this day, the exchange rate was 1,240.6 won per dollar, up 10.1 won from the previous day's closing price. The exchange rate started at 1,236.0 won, up 5.5 won, and further increased to surpass the 1,240 won level.

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