Bank of Korea Provides Financial Sector with 10 Trillion Won Loan Secured by Corporate Bonds (Comprehensive)

Bank of Korea Establishes Special Financial Stability Loan System

[Image source=Yonhap News]

[Asia Economy Reporter Kim Eun-byeol] The Bank of Korea will lend funds up to a maximum of 10 trillion won to banks, securities firms, and insurance companies using general corporate bonds with a credit rating of AA- or higher 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, the Bank of Korea plans to lend 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 corporations as collateral for up to six months. Banks will be lent under Article 64 of the Bank of Korea Act, and non-bank financial institutions under 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.

A Bank of Korea official explained the purpose of establishing the system, saying, "It is not currently considered that the credit extension function of financial institutions has significantly deteriorated, but if the impact of COVID-19 prolongs, it cannot be ruled out that there will be significant difficulties in fundraising for corporations, banks, and non-bank financial institutions." It is also reported that the government has reached a consensus on the establishment of this system.

Initially, it was expected that only securities firms and insurance companies would be included as loan recipients under this system, but banks were also included. The Bank of Korea stated, "This system is not a measure to support a specific industry but to support the stability of corporate bonds," adding, "Therefore, banks and insurance companies, which play an important role as major investors in the corporate bond market along with securities firms, were included as eligible lending institutions."

The lending system will be operated temporarily for three months within a limit of 10 trillion won, with decisions on extension and increase to be made later depending on the financial market situation and limit exhaustion. Funds will be provided without restriction within the limit when eligible corporate bonds are provided as collateral. However, the individual institution's loan limit is within 25% of its own capital.

The system targets 16 domestic banks and 23 foreign bank branches. Securities firms eligible for loans include those designated as Bank of Korea securities simple trading institutions, repurchase agreement (RP) trading institutions, or government bond primary dealers (PDs).

The loan interest rate will be determined by adding 85 basis points (1bp = 0.01 percentage point) to the 182-day Monetary Stabilization Bond rate. As of the 14th, this rate was about 1.54%. A Bank of Korea official explained, "Considering the maturity (6 months), the reference rate for the loan was set as the 182-day Monetary Stabilization Bond," and "the spread was set considering the corporate bond credit spread level during past financial market deteriorations." He also emphasized, "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%, commercial paper (3 months, A1) around 2.1%)."

Regarding criticism that support effects are limited because the loan collateral is restricted to high-quality corporate bonds, the Bank of Korea responded, "Because there is no external credit enhancement device, it is limited to high-quality corporate bonds." This means efforts are needed to minimize losses by the central bank, as such losses ultimately burden taxpayers. Furthermore, it is expected that if the corporate bond market improves, difficulties in non-investment grade corporate bonds and the commercial paper market will also be alleviated.

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