Bank of Korea Ends Simple Purchase Measure of Special Bank Bonds Introduced After 12 Years (Update)

Evaluation of Improvements in Domestic Financial Market Liquidity
Reduction in the Scope of Eligible Collateral Securities

[Image source=Yonhap News]

[Asia Economy Reporter Kim Eun-byeol] The Bank of Korea (BOK) will end the 'simple purchase of special bank bonds' measure, which was introduced for the first time in 12 years since the financial crisis, at the end of this month. This measure involved the BOK buying bonds from institutions such as the Korea Development Bank and the Export-Import Bank of Korea to provide liquidity, but it was deemed no longer necessary as the market has stabilized. Since the BOK introduced this measure, it has never directly purchased special bank bonds. The range of bonds that banks can use as collateral when borrowing from the BOK has also been narrowed.

On the 11th, the BOK held a Monetary Policy Committee meeting and decided to end the policy of including ▲industrial finance, small and medium enterprise finance, and export-import finance bonds (special bank bonds) ▲and Korea Housing Finance Corporation mortgage-backed securities (MBS) in the simple purchase securities for open market operations at the end of this month. In April last year, the BOK introduced this measure as bond yields surged. Since the issuance of special bank bonds inevitably increased to support companies and households damaged by COVID-19, rising funding costs would have increased the burden. However, to date, the BOK has never conducted a simple purchase of special bank bonds. This was due to the effect of central banks worldwide lowering benchmark interest rates to near zero and the market sufficiently absorbing the bonds.

The measure to expand the range of securities eligible for repurchase agreement (RP) transactions and loan collateral will also end at the end of this month. This means the range of collateral that banks can use to borrow from the BOK will be reduced.

The BOK also ended the measure to provide loans to securities and insurance companies from the 3rd of last month. There has been no case of non-bank financial institutions borrowing directly from the BOK. The unlimited repurchase agreement (RP) purchase system, which supplied unlimited liquidity to financial institutions, was also discontinued in July last year.

A BOK official explained, "As liquidity conditions in the domestic financial market have recently improved, the need to extend measures implemented to expand the liquidity supply base during the COVID-19 response has decreased."

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