[Q&A] BOK Explains Reasons for 'Corporate Bond Collateral Loans' to Securities and Insurance Companies...

Bank of Korea Establishes Special Financial Stability Loan System

[Image source=Yonhap News]

[Asia Economy Reporter Kim Eunbyeol] The Bank of Korea will start lending to banks, securities firms, and insurance companies from the 4th of next month, using high-quality corporate bonds issued by general companies as collateral. This is a safety measure in preparation for the possibility of significantly increased difficulties in fundraising due to the prolonged COVID-19 pandemic.

The Monetary Policy Committee of the Bank of Korea held an extraordinary meeting on the 16th and resolved to establish a new lending system called the "Financial Stability Special Lending System." Accordingly, loans will be provided to banks and non-bank financial institutions such as securities firms and insurance companies using high-quality corporate bonds (credit rating AA- or higher) issued by general companies as collateral, for up to six months. Banks will lend based on Article 64 of the Bank of Korea Act, and non-bank financial institutions based on Article 80. When eligible corporate bonds are provided as collateral, the system will operate as a standby credit facility allowing borrowing from the Bank of Korea at any time.

This system will be operated temporarily for three months with a limit of 10 trillion won, and decisions on extension or increase will be made later depending on the financial market situation and limit exhaustion. The Bank of Korea stated, "By immediately lending at a certain interest rate (182-day Monetary Stabilization Bond rate + 0.85 percentage points, approximately 1.54% as of the 14th) according to the funding demand of non-bank financial institutions such as securities firms using corporate bonds issued by private companies as collateral, we aim to stabilize the corporate bond market and contribute to improving the funding conditions of financial institutions."

Furthermore, it added, "Having a safety device prepared in advance for the possibility of an emergency situation will also be effective in alleviating market anxiety."

Below is a Q&A regarding the "Financial Stability Special Lending System."

- Reason for establishing the system

▲ Although instability in the corporate bond market has somewhat eased, the uncertainty of the negative impact of COVID-19 remains very high, and credit caution in the financial market has increased again, raising the possibility of renewed instability in the corporate bond market and deterioration of funding conditions for related financial institutions. It was judged necessary to introduce a new lending system as a safety device in preparation for an emergency situation.

- Is the current financial market situation severe enough to invoke Article 80 of the Bank of Korea Act?

▲ It is not currently considered that the credit provision function of financial institutions has significantly deteriorated, but if the impact of COVID-19 prolongs, there is a possibility of serious difficulties in fundraising for companies, banks, and non-bank financial institutions. Therefore, a standby special lending system has been prepared.

- Is the loan interest rate high?

▲ Considering the maturity (6 months), the base lending rate was set at the 182-day Monetary Stabilization Bond rate (0.69% as of the 14th). The spread was determined by considering the corporate bond credit spread level during past financial market deteriorations. Assuming the use of this system, the loan interest rate will be around 1.5%, which is not considered high compared to market interest rates (corporate bonds (3 years, AA-) around 1.7%, CP (3 months, A1) around 2.1%).

- Is limiting collateral to high-quality corporate bonds restricting the support effect?

▲ Since there is no external credit enhancement device, collateral is limited to high-quality corporate bonds. Because losses by the central bank ultimately burden taxpayers, efforts to minimize this are necessary. It is expected that if the corporate bond market improves, difficulties in the non-investment grade corporate bond and CP markets will also be alleviated.

- Why lend to banks and insurance companies in addition to securities firms?

▲ This system is not a measure to support a specific industry but to support corporate bond market stability. Therefore, banks and insurance companies, which play important roles as major investors in the corporate bond market along with securities firms, were included as eligible lending institutions.

- What opinions did the government present?

▲ Since Article 80 of the Bank of Korea Act is a very exceptional measure, it is stipulated to hear the government's opinion. The government agreed that this system can serve as a safety net contributing to stabilizing the corporate bond market and alleviating financial market instability.

- How will loan post-management be handled?

▲ When using this system, submission of materials will be requested to understand the management status and asset soundness of the eligible institutions. Furthermore, if the financial condition of the eligible institutions deteriorates, measures such as reducing loan transaction limits, suspending or canceling transaction qualifications will be taken, and legal procedures such as collateral disposal will be prepared in case of default.

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