On the Day the BOK Decided on Unlimited RP Purchases... "Collateral Securities Expansion, 30 Trillion Won Capacity Increase"

Bank of Korea March 26 Monetary Policy Committee Minutes

Some MPC Members Say "Reverse Stress Test Needed to Measure Financial Institutions' Limits"

[Image source=Yonhap News]

[Asia Economy Reporter Kim Eunbyeol] The Bank of Korea (BOK) expects that the collateral capacity of institutions involved in repurchase agreement (RP) transactions (such as banks and securities firms) will expand by at least 30 trillion won as it broadens the range of securities eligible for RP transactions under the full allotment method.

According to the minutes of the Monetary Policy Committee (MPC) meeting held on the 26th of last month, released by the BOK on the 14th, some MPC members inquired about the impact of expanding RP-eligible securities on RP transaction institutions. The relevant BOK department stated, "Considering the scale of special bonds held by banks and securities firms and the potential use of bond lending, the collateral capacity is expected to increase by at least 30 trillion won."

At the MPC meeting on the 26th of last month, the BOK decided to introduce a 'full allotment liquidity support scheme.' Given growing concerns over liquidity among financial institutions due to the novel coronavirus disease (COVID-19), the BOK planned to purchase RPs from financial firms once a week for three months at an interest rate below 0.85% per annum without limit. At that time, the BOK added 11 securities firms to the list of financial institutions eligible to participate in RP bidding. It also newly included eight types of bonds issued by public enterprises, including Korea Electric Power Corporation, in addition to government bonds and monetary stabilization bonds, which had previously been the only eligible RP securities.

One MPC member asked about the selection criteria for the newly added public enterprise collateral securities, and the relevant department responded, "They were selected considering the credit rating levels obtained from domestic and international credit rating agencies and whether there are government loss compensation clauses under special laws." The BOK also added, "If necessary, such as when the bond issuance market tightens, we will actively consider expanding RP-eligible securities to include outright purchase targets." In fact, on the 9th, the BOK added special bank bonds (industrial finance bonds, small and medium enterprise finance bonds, export-import finance bonds) and Korea Housing Finance Corporation MBS to the outright purchase securities list.

Some MPC members suggested the need to add securities firms that are not open market operation participants to the RP transaction institutions, and accordingly, securities firms designated as government bond specialist dealers were also included.

Meanwhile, at the same MPC meeting, the BOK’s Financial Stability Department head reported on the 'financial stability situation.' The members expressed the view that "given the very high uncertainty in financial markets, it is urgent to closely identify the factors increasing volatility in the stock, bond, and foreign exchange markets and to review countermeasures." They also stated, "It is necessary to more strictly assess the shock absorption capacity of financial institutions facing risks of economic slowdown and increased financial market volatility due to the spread of COVID-19, in terms of liquidity and capital adequacy."

Some members also noted the need for a new approach when setting shock scenarios for financial institution stress tests. Typically, stress tests benchmark the global financial crisis, but since the current crisis stems from an unprecedented global real economy shock, there may be limitations in estimating loss magnitudes using existing methods. They added that it is necessary to conduct 'reverse stress tests' to measure the limits of shocks that financial institutions can endure.

Another member pointed out, "Regarding corporate credit, which is increasing faster than household credit, private placement bonds have significantly grown in recent years." Unlike public corporate bonds, which have easily accessible statistics, private placement bonds lack detailed information such as issuance amounts by issuer, so efforts should be made to reduce data gaps to closely monitor risks in the corporate bond market.

Finally, some members expressed the opinion that it is necessary to study the medium- to long-term impact on financial institutions’ management environment and the financial system of response measures such as credit supply expansion and debt repayment deferrals taken not only due to COVID-19 but also during the crisis recovery process.

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