Bank of Korea Maintains Special Loan Program for Securities Firms... No Loans Issued but Provides Psychological Stability (Comprehensive)

Operation Period Extended by 3 Months... August 3 → November 3

[Image source=Yonhap News]

[Asia Economy Reporter Kim Eun-byeol] The Bank of Korea has decided to extend by three months until November the securities and insurance company (non-bank financial sector) loan program it had exceptionally introduced to respond to the shock of the novel coronavirus disease (COVID-19). Although no non-bank institutions have actually utilized this program for loans over the past three months, the Bank of Korea explained that it decided to maintain the program to provide psychological stability to the market amid ongoing COVID-19 uncertainties. There is also the advantage of being able to respond quickly by using the program if a market shock occurs.

At its meeting on the 30th, the Bank of Korea's Monetary Policy Committee announced that it had resolved to extend the operation period of the "Financial Stability Special Loan Program," which was established with a scale of 10 trillion won, from the original August 3 to November 3, a three-month extension. The Financial Stability Special Loan Program is a system where the Bank of Korea provides loans to securities companies or insurance companies using high-quality corporate bonds (credit rating AA- or higher) issued by general corporations as collateral. It was created in preparation for the possibility that securities companies or insurance companies might face significant difficulties in raising funds due to the impact of COVID-19.

This was the first time the Bank of Korea directly lent to non-bank financial institutions, drawing attention. 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 financial crisis. To implement this measure, the Bank of Korea invoked Article 80 of the Bank of Korea Act for the first time in 23 years. Article 80 of the Bank of Korea Act is an exception clause that allows lending to for-profit companies when there is a significant difficulty or a high possibility of difficulty in raising funds. Bank of Korea Governor Lee Ju-yeol also stated at a press conference in April, "Lending support to specific companies through Article 80 of the Bank of Korea Act is an exceptional measure that goes beyond the usual functions of a central bank."

Although the plan was to proceed with loans up to a limit of 10 trillion won, no securities or insurance companies actually took out loans. The main reason cited is that markets stabilized rapidly as central banks worldwide, including the U.S. Federal Reserve (Fed), injected liquidity. Although securities companies experienced liquidity crises due to overlapping issues such as margin calls on equity-linked securities (ELS), refinancing of real estate project financing (PF), and asset-backed commercial paper (ABCP), it is also interpreted that the situation was not urgent enough to require corporate bond collateral loans.

Nevertheless, the Bank of Korea maintained the program because simply having the program acts as a safety net for the market. There is also a psychological effect that the central bank can lend money anytime if the situation worsens. A Bank of Korea official explained, "The Fed also announced that it would maintain various loan programs introduced in response to COVID-19 just before the recent Federal Open Market Committee (FOMC) meeting," adding, "Since the COVID-19 situation is ongoing, we decided to maintain the program to serve as a psychological safety net."

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