Bank of Korea Conducts 6 Trillion Won RP Purchase... Expansion to Eligible Collateral Securities (Update)

Lee Chang-yong, Governor of the Bank of Korea, is presiding over the regular Monetary Policy Committee meeting held on the 25th at the Bank of Korea in Jung-gu, Seoul. / Photo by Joint Press Corps

[Asia Economy Reporter Seo So-jung] Amid the growing liquidity crisis caused by the Legoland incident, the Bank of Korea's Monetary Policy Committee announced on the 27th that it will temporarily purchase repurchase agreements (RPs) worth 6 trillion won from institutions eligible for RP transactions, such as securities firms and Korea Securities Finance Corporation, to stabilize the market.

In addition, the scope of eligible collateral securities for loans will be temporarily expanded for three months. Besides existing government bonds, monetary stabilization bonds, government-guaranteed bonds, Korea Housing Finance Corporation mortgage-backed securities (MBS), and special bank bonds, bonds issued by banks and nine public institutions including Korea Electric Power Corporation will be included.

Furthermore, the plan to raise the collateral provision ratio for settlement of netting obligations has been postponed for three months. In April 2020, during the early stages of the COVID-19 crisis, the Bank of Korea lowered the netting collateral ratio from 70% to 50%, but raised it back to 70% last February. It had planned to increase it to 80% next year but has deferred this. The Bank of Korea expects this measure to ease the collateral burden on financial institutions by 7.5 trillion won.

The Bank of Korea stated, "These measures are expected to contribute to the smooth functioning of the short-term financial market and bond market, which are major transmission channels of monetary policy," adding, "They are implemented to ensure financial stability, and particularly in the case of RP purchases, the liquidity supplied will be absorbed through open market operations, so this does not contradict the current monetary policy stance."

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