Bank of Korea Considering Loans to Securities Firms Using Corporate Bonds as Collateral... Eyes on June 9th Monetary Policy Committee Meeting

Governor Lee Ju-yeol "Reviewing Direct Loans to Non-Bank Financial Institutions Such as Securities Firms"

[Image source=Yonhap News]

[Asia Economy Reporter Kim Eun-byeol] Interest is focused on the regular Monetary Policy Committee meeting on the 9th as Lee Ju-yeol, Governor of the Bank of Korea (BOK), announced that direct loans could be made to non-bank financial institutions such as securities firms. This is because detailed information such as the specific loan amount, collateral securities conditions, and implementation timing may be revealed.

On the 3rd, a BOK official stated, "According to Article 80 of the Bank of Korea Act, a resolution by the Monetary Policy Committee is required to lend to non-bank financial institutions." However, the official added, "It has not been decided whether the detailed loan conditions will be prepared and first approved by the Monetary Policy Committee or whether approval will be obtained when the loan is actually implemented in the future."

The governor convened an executive meeting the previous afternoon and said, "If the situation worsens, we can consider the option of lending to non-bank financial institutions based on Article 80 of the Bank of Korea Act to stabilize the corporate bond market." Article 80 of the Bank of Korea Act states that "if there is a significant difficulty or a high possibility of difficulty in raising funds from financial institutions, loans may be extended to profit-making enterprises engaged in financial business that are not financial institutions." This means that if market conditions deteriorate, the BOK can lend to "non-bank financial institutions," such as securities firms and insurance companies.

The most curious point in the market is whether the BOK will take corporate commercial paper (CP) or corporate bonds as collateral when providing loans. The key issue is what credit rating of corporate bonds and CP will be accepted as collateral and at what ratio. Depending on the situation, the creditworthiness of the borrowing financial institution may also be limited. The BOK may review the financial institution's condition and set a credit rating floor before extending loans.

A BOK official said, "Although this is different from the BOK directly purchasing specific companies' CP or corporate bonds, this will have the effect of the BOK purchasing bonds that the market cannot absorb." The official added, "At the same time, it will help ease liquidity problems recently experienced by securities firms." Most of the financial institutions participating in the repurchase agreement (RP) purchase auction conducted by the BOK the previous day to expand liquidity supply were securities firms.

Meanwhile, it is widely expected that the base interest rate will be held steady at the Monetary Policy Committee meeting on the 9th. Since the BOK has already implemented various policies, it is anticipated that they will focus on market monitoring while observing the spread of COVID-19 and the extent of economic damage for the time being. Gong Dong-rak, a researcher at Daishin Securities, said, "It is expected that the April Monetary Policy Committee will unanimously decide to keep the interest rate unchanged," adding, "Last month, a 'big cut' of 0.50 percentage points was made, and measures such as 'Korean-style quantitative easing' were also taken, so they will likely wait to observe the effects before taking further action."

Overseas investment banks (IBs) also forecast that the BOK is unlikely to cut interest rates in April but may lower rates once during the second quarter. They analyze that easing rates at a time when COVID-19 has somewhat subsided and the economy can rebound will maximize the effect. Barclays, Goldman Sachs, HSBC, and UBS emphasized the possibility of a rate cut by the BOK in the second quarter. Citibank and JP Morgan, however, predicted that rates will remain unchanged going forward.

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