Lee Chang-yong Faces Test Amid Aftermath of Legoland Incident (Comprehensive)

Economic and Financial Authorities to Hold Emergency High-Level Meeting on 23rd and Announce Measures
Impact on November Monetary Policy Inevitable if Funding Squeeze Worsens

Bank of Korea Governor Lee Chang-yong and Chief Economic Secretary Choi Sang-mok attended the 'Emergency Macroeconomic and Financial Meeting' held on the 23rd at the Korea Federation of Banks building in Jung-gu, Seoul. After the meeting, they responded to questions from the press. Photo by Yoon Dong-joo doso7@/Photo by Yoon Dong-joo doso7@

[Asia Economy Reporter Seo So-jung] As the corporate bond market further freezes due to the Gangwon-do Legoland asset-backed commercial paper (ABCP) crisis, the financial investment industry’s urgent request for support from Lee Chang-yong, Governor of the Bank of Korea (BOK), has deepened the central bank’s dilemma. The BOK empathizes with the difficulties faced by the financial investment sector but 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 conflict with monetary policy. However, there are expectations that if the liquidity crunch worsens, the BOK may adjust the pace and magnitude of rate hikes considering financial market stability.

On the 23rd, Deputy Prime Minister and Minister of Economy and Finance Choo Kyung-ho held an emergency macroeconomic and financial meeting at the Seoul Banking Hall with BOK Governor Lee Chang-yong, Financial Services Commission Chairman Kim Ju-hyun, Financial Supervisory Service Governor Lee Bok-hyun, and Presidential Office Economic Secretary Choi Sang-mok. They agreed to expand the liquidity supply program to a scale of "50 trillion won plus alpha (+α)" to resolve the liquidity market instability triggered by the recent Legoland ABCP non-repayment incident.

◆ BOK May Expand Eligible Collateral Securities = On the same day, the BOK mentioned the possibility of expanding the scope of eligible collateral securities as a micro-level measure to stabilize the market. Governor Lee stated, "The BOK will discuss including bank bonds and public institution bonds, in addition to government bonds, in the eligible collateral securities at the next Monetary Policy Committee meeting."

Banks currently provide only government bonds, monetary stabilization bonds, and government-guaranteed bonds as collateral (eligible collateral securities) when borrowing from the BOK, but they are requesting that bank bonds also be included. The BOK had recognized bank bonds as eligible collateral securities in March 2020 in response to the COVID-19 crisis but ended this temporary measure in March last year. Governor Lee is scheduled to have a dinner meeting with heads of commercial banks (Bankers Association board members) on the 26th, where banks are expected to urge the BOK to play a role in facilitating smooth funding supply to companies.

However, Governor Lee expressed caution regarding the financial investment industry’s request to reactivate the "Financial Stability Special Loan Program." On the 18th, Financial Investment Association Chairman Na Jae-cheol met with Governor Lee and requested the reintroduction of the Financial Stability Special Loan Program, which was implemented immediately after the COVID-19 outbreak, citing liquidity crunches in the corporate bond market causing difficulties for securities firms and asset management companies. The Financial Stability Special Loan Program allows banks and non-bank financial institutions such as securities firms and insurance companies to borrow from the BOK for up to six months using high-quality corporate bonds (credit rating AA- or higher) issued by general companies as collateral. It operates as a standby credit facility that permits borrowing from the BOK whenever eligible corporate bonds are provided as collateral. This program was newly introduced during the COVID-19 crisis and ended in February last year.

Governor Lee said, "The current measures do not include the Special Purpose Vehicle (SPV) or other options like the Financial Stability Special Loan Program. We will comprehensively review the impact of these measures on the market and international financial market volatility, and if necessary, discuss them again at the Monetary Policy Committee."

Bank of Korea Governor Lee Chang-yong and Chief Economic Secretary Choi Sang-mok attended the 'Emergency Macroeconomic and Financial Meeting' held on the 23rd at the Bankers' Hall in Jung-gu, Seoul, and adjusted their glasses after the meeting. Photo by Yoon Dong-joo doso7@

◆ Caution on Reactivating Financial Stability Special Loan and SPV = In the market, while there is a possibility that the BOK’s Monetary Policy Committee will soon accept the expansion of eligible collateral securities requested by the banking sector, reactivating the Financial Stability Special Loan or SPV is expected to face fierce debate due to conflicts with the rate hike stance and monetary policy.

Within the BOK, negative views dominate. A BOK official said, "We are not currently considering reintroducing the Financial Stability Special Loan Program. It was introduced under special circumstances during the COVID-19 crisis and was a special loan based on the BOK Act at that time, so its use would require discussion among Monetary Policy Committee members."

Another BOK official added, "The most important thing is an accurate diagnosis and judgment on whether the current situation warrants the introduction of the Financial Stability Special Loan. If it were a financial crisis stabilization situation like during COVID-19, we would actively consider its introduction, but the current situation is different, and continuing the rate hike stance could conflict with monetary policy, so a cautious approach is necessary."

Despite growing market demands, the BOK faces a difficult position as it must continue the rate hike stance amid inflation and rising exchange rates. A bond market official said, "Taking bond market stabilization measures amid high inflation and high exchange rates would be another form of quantitative easing, so it would not be easy for the BOK to take preemptive action."

Accordingly, the upcoming Monetary Policy Committee meeting next month may not rule out the current liquidity crunch as a major variable. The U.S. Federal Reserve is continuing its aggressive tightening, making a rate hike in Korea inevitable next month. If the liquidity crunch worsens, the BOK may find it burdensome to take a third big step rate hike following this month. Regarding this, Governor Lee dismissed concerns, saying, "The liquidity market stabilization measures are mainly due to increased credit concerns centered on ABCP recently, and there is no major problem related to fund circulation. It is a micro-level issue centered on the commercial paper (CP) market, so it does not mean that the premise of macro monetary policy has changed."

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