'From Hawk to Crisis Dove', The BOK Governor Has Changed Completely

Reversal as Financial Markets Fluctuate Amid COVID-19 Spread
Impact of Past Foreign Exchange and Financial Crises
Also Evaluated as 'Taking an Uncharted Path'

Ijuyeol, Governor of the Bank of Korea [Photo by Yonhap News]

[Asia Economy Reporter Kim Eunbyeol] "Are you saying that Lee Ju-yeol, Governor of the Bank of Korea (photo), is just following the United States? Some may criticize him, but Governor Lee must be making difficult decisions after intense deliberation. The Bank of Korea has never implemented such measures before."

This was the assessment of a bond market expert regarding Governor Lee on the 20th, when the Bank of Korea decided to establish a special purpose vehicle (SPV) to directly lend 8 trillion won and purchase low-credit corporate bonds and commercial papers (CP). He said, "Due to the COVID-19 pandemic, the Bank of Korea is treading 'uncharted territory,' and by showing Governor Lee's willingness to keep all options open in response, the market has developed the perception that there is a so-called 'backing (central bank)' no matter what shock occurs."

The real and financial complex crisis caused by COVID-19 is transforming Governor Lee. He has been classified as a 'hawk' who usually prioritizes financial stability and favors monetary tightening policies. Like many Bank of Korea officials, he is cautious by nature. His nickname in the market was even "Mr. Meticulous." Until February, Governor Lee voted to keep interest rates unchanged.

The turning point for Governor Lee came in March. As COVID-19 spread to the US and Europe and the US financial market fluctuated, prompting the Federal Reserve (Fed) to take aggressive action, Governor Lee's stance also changed. At a Bank of Korea executive meeting at the time, he instructed, "Submit all possible cards to prepare for the COVID-19 crisis by country." In addition to the 'big cut' in the base rate (from 1.25% to 0.75%), measures such as ▲expansion and rate cuts of financial intermediary support loans ▲purchase of repurchase agreements (RP) on a full supply basis (Korean-style quantitative easing) ▲25% expansion of bank forward foreign exchange position limits ▲special loans to non-bank financial institutions such as securities firms were introduced one after another. The Korea-US currency swap was also arranged just three days after the base rate was drastically cut.

Governor Lee was able to quickly change direction due to his past crisis experience. He was the Deputy Governor of the Bank of Korea in charge of monetary and credit policy during the 2008 financial crisis. At that time, the Fed lowered the base rate to 0% and continued to roll out additional measures. In 1999, while the aftermath of the foreign exchange crisis was still ongoing, he worked as a senior investigator at the New York office.

Ultimately, he developed the principle that "in a major crisis, the central bank must do everything it can," which enabled him to swiftly transform into a 'crisis-type dove' this time.

Regarding the SPV, which was confirmed to launch after much difficulty, Governor Lee reportedly persuaded executive officials and Monetary Policy Committee members by saying, "Let's find ways allowed under the Bank of Korea Act rather than focusing on what cannot be done." He believed it was necessary to establish a system in response to the crisis. The Fed was also able to accelerate its response this time thanks to its experience establishing corporate bond and CP purchase facilities (PMCCF, SMCCF, CPFF) in 2008.

Meanwhile, the Bank of Korea judges that the first SPV (10 trillion won) is sufficiently sized unless there is an additional shock. According to the Korea Securities Depository, the total size of domestic corporate bonds rated BBB or below currently stands at 4.522 trillion won. The Bank of Korea estimates a similar scale for corporate bonds. The amount of corporate bonds maturing this year is about 1.5 trillion won, and for CPs rated A3, the amount is around 2 to 3 trillion won. Companies eligible for SPV purchases include Korean Air, Doosan Infracore, Doosan Heavy Industries & Construction, Asiana Airlines, and Hyundai Rotem.

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