Bank of Korea to Supply Liquidity via Special Banks... Preparing Loan Plans for Securities Firms

Decision to Purchase Saneunchae and Sueunchae
Review of Corporate Bond Collateral Loans by Securities Firms
Concerns Over 'Moral Hazard' Controversy

Base Rate Held at 0.75%
Already Supplied 45 Trillion Market Liquidity
"Let's Observe the Effect of the Big Cut" Judgment

[Asia Economy Reporters Eunbyeol Kim, Sehee Jang, Jihwan Park] Contrary to market expectations, the Bank of Korea (BOK) did not finalize a loan plan for non-bank financial institutions on the 9th. Since direct lending by the BOK to securities firms is a sensitive issue, detailed measures are being carefully reviewed. Instead, the BOK decided to include special bank bonds among the securities subject to open market operations. This means providing liquidity indirectly to allow special banks to purchase more corporate bonds or commercial papers (CP) and support the market.

◆Purchasing Special Bank Bonds to Expand Liquidity= The BOK decided to include special bank bonds, which were previously limited to government bonds and government-guaranteed bonds, in the securities eligible for outright transactions. When the BOK purchases securities in the financial market, an equivalent amount of liquidity (base money) is supplied to the market, and conversely, when it sells securities it holds, an equivalent amount of liquidity is withdrawn. By purchasing special bank bonds such as those issued by the Korea Development Bank, the BOK supplies funds to financial institutions, enabling special banks to issue bonds at lower interest rates. Furthermore, if the funds raised are used to purchase corporate bonds, it helps stabilize the bond market. This measure will be implemented from the 14th and will be valid until March 31, 2021.

A banking sector official said, "The issuance scale of special bank bonds by institutions like the Korea Development Bank and Industrial Bank of Korea is large, and allowing the BOK to absorb special bank bonds held by general commercial banks is expected to increase liquidity for general banks." He added, "If the BOK directly purchases special bank bonds from banks, it is meaningful in that banks can also raise funds under better conditions." Recently, commercial banks that increased loans in line with the government's COVID-19 response measures have been concerned about a decline in net interest margin (NIM), so this move is intended to make liquidity easier to secure. However, it is uncertain whether this measure will induce special banks such as the Korea Development Bank, Industrial Bank of Korea, and Export-Import Bank of Korea to increase issuance. He said, "Since the BOK's situation differs from that of the U.S. Federal Reserve (Fed), it seems to be taking a conservative, step-by-step approach."

◆Loans to Securities Firms Under Review= The BOK did not decide on loans to securities firms and other non-bank financial institutions on this day because there was no consensus with the government yet, and concerns were raised that using high-risk CP as collateral could lead to moral hazard issues among securities firms. Therefore, it appears that more time will be taken for review.

On the 2nd, BOK Governor Lee Ju-yeol convened an executive meeting and mentioned that a "secured loan to securities firms" plan could be considered. This plan involves lending against high-quality corporate bonds and CP held by securities firms as collateral. According to Article 80 of the Bank of Korea Act, secured loans to non-bank financial institutions require the resolution of the Monetary Policy Committee, so attention was focused on whether a loan plan would be decided and on the scope and targets of such loans, but no specific details were announced.

The securities industry evaluated that if the BOK lends against corporate bonds, it would greatly help secure liquidity. According to the Korea Securities Depository, as of the 8th, the outstanding issuance of corporate bonds and CP stood at KRW 207.8608 trillion and KRW 65.4962 trillion, respectively. Among these, securities firms hold corporate bonds worth between KRW 70 trillion and KRW 80 trillion. These corporate bonds are high-quality with AA ratings or higher, so the BOK can lend against them without significant risk. It is reported that whether CP will be included as collateral for loans has not yet been decided.

◆"Let's Monitor Interest Rates for the Time Being"= The BOK's decision to keep interest rates unchanged on this day is interpreted as a sign to observe the effects of the measures implemented so far. KB Securities researcher Sanghoon Kim said, "It seems there was no situation warranting an additional cut in the base rate," adding, "Since central banks worldwide have recently introduced measures and international markets have stabilized, the BOK seems to be taking a wait-and-see approach." The BOK's future response will likely depend on this year's growth rate.

First, the issue is the first-quarter GDP growth rate, which is expected to be negative. The BOK will announce the preliminary real GDP growth rate for the first quarter on the 23rd. At the economic outlook briefing in February, the BOK stated, "There is a possibility that the first-quarter GDP this year will be lower than the -0.4% recorded in the first quarter of last year." At that time, Lee Hwan-seok, head of the BOK's research department, predicted, "Short-term negative impacts due to COVID-19 are inevitable. Real indicators for February and March will significantly slow down." The annual growth rate is also expected to be significantly revised. In February, the BOK forecasted a 2.1% growth rate for this year, but the May economic outlook may revise it to a growth rate in the 0% range.

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