Hanil, Emergency Loans to Securities Firms... Loan Expansion Possible up to 40 Trillion Collateral Amount

[Image source=Yonhap News]

[Asia Economy Reporter Kim Eunbyeol] The Bank of Korea has decided to lend funds to non-bank financial institutions such as securities firms and insurance companies using corporate bonds from general companies as collateral. Initially, it plans to lend up to 10 trillion won, but if the situation worsens, it intends to increase the loan amount up to the total collateral value of 40 trillion won.

According to the Bank of Korea's findings on the 17th, the domestic banks currently hold about 11 to 12 trillion won worth of collateral capacity in 'AA-' rated corporate bonds. Securities firms have about 5 trillion won, and six insurance companies have around 23 trillion won in collateral capacity. A Bank of Korea official stated, "Although the bond market currently appears quite stable, this system was created to prepare for a potential deterioration in the credit market," adding, "The extension and increase of the loan amount can be decided depending on the situation." Even if the initially planned 10 trillion won loan is fully utilized, an additional amount corresponding to about 30 trillion won in collateral can be supported.

The Bank of Korea's Monetary Policy Committee held an extraordinary meeting the day before and resolved to establish a new lending system called the 'Financial Stability Special Lending System.' This system focuses on stabilizing the bond market. Since the Bank of Korea has a policy not to directly purchase corporate bonds of specific companies, non-bank financial institutions will provide corporate bonds as collateral to the Bank of Korea and receive loans. Banks will lend based on Article 64 of the Bank of Korea Act, and non-bank financial institutions based on Article 80. The system operates as a standby credit facility allowing borrowing from the Bank of Korea at any time when eligible corporate bonds are provided as collateral.

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. A Bank of Korea official explained, "This system is not a measure to support a specific industry but to underpin the stability of corporate bonds," adding, "Therefore, banks and insurance companies, which play important roles as major investors in the corporate bond market alongside securities firms, were included as eligible loan institutions."

The lending system will be operated temporarily for three months within a 10 trillion won limit, with the possibility of extension and increase depending on the situation. Funds will be provided without restriction within the limit when eligible corporate bonds are offered as collateral. However, the individual institution's loan limit is within 25% of its own capital. The loans target 16 domestic banks and 23 foreign bank branches. The loan interest rate will be determined by adding 85 basis points (1bp = 0.01 percentage points) to the 182-day Monetary Stabilization Bond rate.

However, there are criticisms that the support effect is limited because the loan collateral is restricted to high-quality corporate bonds only. Since there is no external credit enhancement device, only high-quality corporate bonds will be accepted as collateral. Because the corporate bond amount is not recognized as the loan amount in full, the additional supply amount may be less than the collateral capacity. Loans will be made within the recognized value range of eligible collateral provided by the loan recipient institutions.

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