Bank of Korea, Will It Stop Special Loans to Securities Firms Following K-Quantitative Easing?...Decision on 30th

Decision at the Financial Monetary Policy Committee Regular Meeting on the 30th

Measures Stronger Than Those During the Foreign Exchange Crisis in Response to COVID-19 Market Shock
Market Stabilized and Funding Demand Decreased, but Psychological Stability Effect Remains

[Image source=Yonhap News]

[Asia Economy Reporter Kim Eunbyeol] The Bank of Korea (BOK) will decide this week whether to extend the securities and insurance company loan program, which was exceptionally introduced to respond to the shock of the novel coronavirus disease (COVID-19). This is because the tightening in the short-term funding market has somewhat eased, and contrary to concerns, there is no demand for loans. In fact, it is known that no non-bank institutions have utilized this program for loans over the past three months.

According to the BOK on the 28th, the Monetary Policy Committee will decide on the extension of the 'Financial Stability Special Loan Program' at the regular monetary policy meeting on the 30th. The Financial Stability Special Loan Program is a system where the BOK lends to securities companies or insurance companies using high-quality corporate bonds (credit rating AA- or higher) issued by general companies as collateral. It was created in preparation for the possibility that securities companies or insurance companies would face significant difficulties in raising funds due to the impact of COVID-19.

This program was approved by the Monetary Policy Committee on April 16 and implemented from May 4, and it is scheduled to expire on June 4, three months later.

The BOK's direct lending to non-bank financial institutions attracted attention as it was the first time. Previously, during the 1997 Asian financial crisis, support was provided to secondary financial institutions (comprehensive financial companies) through Korea Securities Finance Corporation. This measure was stronger than those taken during the Asian financial crisis. To implement this measure, the BOK invoked 'Article 80 of the Bank of Korea Act' for the first time in 23 years. Article 80 of the Bank of Korea Act stipulates an exception allowing loans to for-profit companies when there is a significant difficulty or a high possibility of difficulty in raising funds. BOK Governor Lee Ju-yeol also stated at a press conference in April, "Loan support to specific companies under Article 80 of the Bank of Korea Act is fundamentally an exceptional measure that goes beyond the usual functions of a central bank."

Initially, loans were planned with a limit of 10 trillion won, but it is known that no securities or insurance companies actually took out loans. The main reason cited is that global central banks, including the U.S. Federal Reserve (Fed), injected liquidity, stabilizing the market rapidly. Although securities companies experienced liquidity crises due to market volatility, including margin calls on equity-linked securities (ELS) and refinancing of real estate project financing (PF) asset-backed commercial paper (ABCP), it is interpreted that the situation was not urgent enough to require corporate bond collateral loans. The market is leaning toward the possibility that this program will not be extended due to lack of demand.

Nevertheless, the Monetary Policy Committee may decide to maintain this program. When the program was created, there was an opinion that actual loans would not be frequent, but there was also an argument that simply having the program could serve as a safety net. There is a psychological effect that the central bank can lend money anytime if the situation worsens. The government also expressed the view that "(the securities company loan) program will serve as a safety net to alleviate market instability."

Meanwhile, the BOK has decided to end the full allotment repurchase agreement (RP) purchase program, known as the 'Korean-style quantitative easing (QE),' this month. This is due to improved funding conditions for securities companies and weak bidding demand relative to the maturity scale.

So far, more than 18 trillion won has been supplied through RP purchases, but recently the bid amount has significantly decreased. This indicates that the market has somewhat stabilized. A BOK official said, "If the funding conditions of financial companies deteriorate or financial market instability occurs due to increased interest rate volatility, we plan to resume full allotment RP purchases or supply liquidity to the market through non-regular RP purchases."

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