Lee Chang-yong Faces Test Amid Aftermath of Legoland Incident

Restart of Special Financial Stability Loan Program vs Monetary Policy Mismatch
Economic and Financial Authorities' Heads to Discuss Measures at Emergency High-Level Meeting on the 23rd

[Asia Economy Reporter Seo So-jeong] As the corporate bond market has further frozen due to the Gangwon-do Legoland asset-backed commercial paper (ABCP) crisis, the financial investment industry has urgently requested support from Lee Chang-yong, Governor of the Bank of Korea (BOK), deepening the BOK's dilemma. While the BOK sympathizes with the difficulties faced by the financial investment sector, it notes that the situation differs from the COVID-19 crisis and plans to continue its rate hike stance next month, making it impossible to ignore the potential discord with monetary policy. As heads of economic and financial authorities hold an emergency macroeconomic and financial meeting on the 23rd to review the corporate bond market and short-term funding markets such as commercial paper (CP), attention is focused on what measures will be discussed to stabilize the market.

According to the BOK on the 23rd, the internal stance regarding the reactivation of the 'Financial Stability Special Lending Facility' requested by Na Jae-cheol, Chairman of the Korea Financial Investment Association, remains negative.

A BOK official stated, "We are not currently considering reintroducing the Financial Stability Special Lending Facility," adding, "It was introduced under special circumstances during the COVID-19 crisis and was a special loan based on the Bank of Korea Act at that time, so utilizing it now would require discussions among the Monetary Policy Committee members."

Earlier on the 18th, Chairman Na met with Governor Lee and explained that securities firms and asset management companies are struggling due to liquidity tightening in the corporate bond market, recommending the reintroduction of the Financial Stability Special Lending Facility that was implemented immediately after the COVID-19 outbreak. In May 2020, the BOK established this facility as a safeguard against the possibility of severe funding difficulties for general corporations, banks, and non-bank financial institutions amid the COVID-19 crisis.

This facility allowed banks and non-bank financial institutions such as securities firms and insurance companies to borrow for up to six months using high-quality corporate bonds (credit rating AA- or higher) issued by general corporations as collateral. It operated as a standby credit facility enabling borrowing from the BOK at any time when eligible corporate bonds were provided as collateral. It was newly introduced during the COVID-19 crisis and ended in February last year.

The financial investment industry is desperately hoping for urgent support from the BOK due to the severe tightening in the corporate bond market, but the consensus is that the BOK is unlikely to actively consider reintroduction. A BOK official conveyed, "The most important thing is an accurate diagnosis and judgment on whether the current situation warrants the introduction of the Financial Stability Special Lending Facility," adding, "If it were a financial crisis stabilization situation like during COVID-19, we would actively consider its introduction, but the current situation differs, and with the ongoing rate hike stance, there could be a conflict with monetary policy, so a cautious approach is necessary."

In the market, voices demanding measures to stabilize the market have grown louder as the corporate bond market has rapidly frozen recently. In the rising interest rate phase, investment demand for lower credit and liquidity credit bonds has sharply contracted, and supply factors such as the expansion of ultra-high-grade issuances like KEPCO bonds and bank bonds, along with the crowding-out effect among credit bonds, have contributed to a significant widening of credit spreads.

Kim Ki-myung, a researcher at Korea Investment & Securities, stated, "The Bond Market Stabilization Fund alone cannot resolve the funding market freeze," and argued, "Measures such as unlimited repurchase agreement (RP) purchases by the BOK, loans to non-bank financial institutions, and liquidity supply by the Korea Securities Finance Corporation should be implemented concurrently." The market is also requesting the reactivation of the BOK's corporate bond and commercial paper (CP) special purpose vehicle (SPV) purchase facility. The SPV was officially launched in July 2020 during the height of the COVID-19 crisis. Gong Dong-rak, a researcher at Daishin Securities, said, "Responding only through the Bond Market Stabilization Fund has limitations in preventing the recent funding market freeze," and predicted, "Additional measures necessary for market response are likely to follow."

Although market demands are intensifying, the BOK faces a difficult dilemma as it must continue its rate hike stance amid persistent inflation. A bond market official said, "Taking bond market stabilization measures amid ongoing high inflation would be another form of quantitative easing, so it would not be easy for the BOK to take preemptive action."

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