The Bank of Korea's Special Bank Bond Purchase Today Draws Mixed Reactions: "Reassuring for the Market" vs. "Ineffective"

Expansion of Liquidity Supply
Concerns Over Signals of Imminent Funding Squeeze Crisis

[Asia Economy Reporter Kangwook Cho] The financial sector's reactions are divided regarding the Bank of Korea's decision to expand liquidity supply through the purchase of special bank bonds. While some view it positively as it facilitates liquidity securing and reassures the market, others hold a contrasting view that the direct effect may not be significant. In particular, concerns that selling bonds of state-run banks currently held could send a negative signal suggesting a liquidity crunch are acting as a factor limiting financial companies' maneuverability.

According to the financial sector on the 14th, special bank bonds such as San-geum bonds and Su-geum bonds issued in Korean won by state-run banks will be included from today as eligible securities for the Bank of Korea's open market operations involving outright transactions. This is the first time since the 2008 global financial crisis that the Bank of Korea has expanded the scope of outright transaction securities to include special bank bonds.

It is estimated that the total amount of won-denominated bonds issued by two state-run banks, Korea Development Bank and Export-Import Bank of Korea, circulating in the domestic market exceeds 120 trillion won. Among these, San-geum bonds issued by Korea Development Bank account for about 101 trillion won, making up the majority. By holding size, as of the 9th, commercial banks hold the largest amount of San-geum bonds at 41.8 trillion won. Following are pension funds and insurance companies with 16.1 trillion won, investment trusts with 14.7 trillion won, and mutual savings banks with about 3.1 trillion won. Korea Development Bank's annual issuance limit for won-denominated bonds is about 70 trillion won, but the actual issuance amount is much less. Additionally, the circulating amount of Su-geum bonds issued by the Export-Import Bank of Korea is estimated at around 20 trillion won, with an average annual issuance size of about 10 to 11 trillion won.

However, this does not mean that the Bank of Korea will directly purchase won-denominated bonds issued by special banks in the domestic market in the future. It refers to purchasing won-denominated bonds already issued by Korea Development Bank and Export-Import Bank of Korea and circulating in the market. In other words, if financial companies such as banks or securities firms want to sell special bank bonds they hold to the Bank of Korea, the Bank will buy them. The Bank of Korea analyzed that this measure will increase the liquidity of special bank bonds, expand the demand base, and lead to smooth capital circulation in the bond market.

Commercial banks also view this positively as a preemptive safety measure against worsening market conditions. A representative from Bank A said, "The Bank of Korea's purchase of special bank bonds circulating in the market will make it easier for commercial banks and others to raise funds," adding, "From the perspective of state-run banks, it can increase demand for issued bonds and indirectly lower the issuance spread."

On the other hand, there are also opinions that the immediate direct effect may not be significant. A representative from Bank B said, "Special bank bonds like San-geum bonds and Su-geum bonds always have high demand in the market," and added, "While there may be long-term effects, the current situation is not such that selling special bank bonds to secure liquidity is necessary."

There are even concerns that selling special bank bonds at this time could send a negative signal to the market. A representative from Bank C said, "The Bank of Korea's policy seems to be symbolic, just a precautionary measure," and pointed out, "If commercial banks sell special bank bonds to secure liquidity, the market may interpret it as experiencing a liquidity crunch, which could have an adverse effect."

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