Bank of Korea to Purchase 6 Trillion KRW in RP... Expansion of Eligible Collateral Securities (Comprehensive)

Decision by the Monetary Policy Committee to Supply Liquidity
Postponement of Gradual Increase in Collateral Securities Ratio for Settlement of Difference Transactions

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

On the 27th, the Bank of Korea’s Monetary Policy Committee held a non-monetary policy direction meeting at the Bank of Korea headquarters in Jung-gu, Seoul, and resolved this measure.

The Bank of Korea stated, "The RP purchase scale is about 6 trillion won in total, which is a separate measure from the government action announced on the 23rd to support liquidity of 3 trillion won to securities firms through Korea Securities Finance Corporation." It added, "The implementation period is until January 31 next year, and the possibility of extension will be reviewed later." The maturity of the purchases will be within 91 days, mainly utilizing 14-day RPs.

Typically, the Bank of Korea absorbs liquidity by selling RPs as a monetary control tool, but exceptionally this time, considering the funding difficulties of securities firms and others, it decided to purchase RPs and supply liquidity.

Additionally, the eligible collateral securities for loans will be temporarily expanded for three months. Besides the existing government bonds, Monetary Stabilization Bonds, government-guaranteed bonds, Korea Housing Finance Corporation mortgage-backed securities (MBS), and special bank bonds, bank bonds and bonds issued by nine public institutions including Korea Electric Power Corporation will be included. This will be implemented for three months from the 1st of next month until the end of January next year.

Bank bonds include agricultural finance bonds, fisheries finance bonds, and financial bonds under the Banking Act. The nine public institutions are Korea Electric Power Corporation, Korea Land and Housing Corporation, Korea National Railway, Small and Medium Business Corporation, Korea Gas Corporation, Korea Expressway Corporation, Korea Water Resources Corporation, Korea Railroad Corporation, and Korea Deposit Insurance Corporation.

Currently, when banks borrow from the Bank of Korea, only government bonds, Monetary Stabilization Bonds, and government-guaranteed bonds are accepted as collateral. With the expansion of eligible collateral securities, banks can use already held bank bonds as loan collateral, easing funding pressure. By submitting bank bonds and others as collateral to the Bank of Korea, banks can secure government bonds and Monetary Stabilization Bonds, thereby alleviating the burden of complying with the Liquidity Coverage Ratio (LCR) and responding to additional margin payments for over-the-counter foreign exchange derivatives transactions in the future. The Bank of Korea estimated that this measure could enable domestic banks to secure up to about 29 trillion won in additional high-quality liquid assets.

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

The Bank of Korea said, "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," and added, "They are implemented for financial stability, and especially in the case of RP purchases, the supplied liquidity will be absorbed through open market operations, so it does not contradict the current monetary policy stance."

Meanwhile, the special financial stability loan that supplies liquidity on a large scale and the reactivation of the Special Purpose Vehicle (SPV) for corporate liquidity support were not approved at this meeting.

A market official said, "The Bank of Korea’s RP purchase plan announced today was not included in the emergency macroeconomic financial meeting held on the 23rd," and added, "It is meaningful in that liquidity was directly supported to securities firms and others through RP purchases."

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