Bank of Korea Provides Liquidity via RP Purchases... "Not a Conflict with Monetary Policy" (Comprehensive Report 2)

6 Trillion Won RP Purchase... Expansion to Eligible Collateral Securities
Different from Full Supply RP Purchase During COVID Period
Postponement of Gradual Increase in Collateral Securities Ratio for Difference Settlement Execution

Bank of Korea Governor Lee Chang-yong is attending the regular board meeting of the Korea Federation of Banks held at the Bankers' Hall in Jung-gu, Seoul on the 26th. Photo by Yoon Dong-joo doso7@

[Asia Economy Reporter Seo So-jeong] Amid growing concerns over a liquidity crunch triggered by the Legoland incident, the Bank of Korea (BOK) has sparked controversy by deciding to directly supply liquidity through repurchase agreement (RP) purchases to securities firms facing severe funding difficulties. Opinions are divided between those who see the need for a certain scale of liquidity provision to put out the urgent fire and those who argue that this move could conflict with the ongoing monetary tightening policy amid interest rate hikes.

On the 27th, the BOK's Monetary Policy Committee announced that it would temporarily conduct RP purchases worth 6 trillion won targeting institutions eligible for BOK RP transactions, including securities firms and Korea Securities Finance Corporation, to stabilize the market.

The Monetary Policy Committee held a non-monetary policy direction meeting at the BOK headquarters in Jung-gu, Seoul, on the morning of the same day and resolved this decision.

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

Typically, the BOK absorbs liquidity through RP sales as a monetary control tool, but unusually, this time it decided to purchase RPs and supply liquidity considering the funding difficulties of securities firms and others.

The BOK’s RP purchase plan was not included in the emergency macroeconomic and financial meeting held on the 23rd, and since the BOK is directly supplying liquidity, it has sparked controversy for potentially conflicting with the monetary tightening stance.

In response, the BOK explained in a subsequent statement, "This RP purchase is a market stabilization measure aimed at facilitating smooth fund circulation in the short-term financial market through liquidity adjustment (liquidity supply via RP purchase and subsequent liquidity absorption through Monetary Stabilization Bonds, etc.)." It emphasized, "There is a significant difference in scale and method compared to the full allotment RP purchases conducted to support large-scale liquidity supply during the COVID-19 period." Since liquidity is mainly supplied on a very short-term basis through 14-day RPs to securities firms experiencing temporary funding shortages, it does not significantly increase liquidity and therefore does not conflict with the current monetary policy stance.

Additionally, 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, bank bonds and bonds issued by nine public institutions including Korea Electric Power Corporation will be included. This will be implemented from the 1st of next month until the end of January next year for three months only.

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 the Deposit Insurance Corporation.

Currently, when banks borrow from the BOK, 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 BOK, banks can alleviate the burden of complying with the Liquidity Coverage Ratio (LCR) through the government bonds and Monetary Stabilization Bonds they secure, and respond to additional margin requirements for over-the-counter foreign exchange derivatives transactions in the future. The BOK estimates 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 guarantee securities will be postponed by three months. The BOK lowered the margin ratio for settlement collateral from 70% to 50% in April 2020 during the early COVID-19 period, but raised it back to 70% in February this year. It was scheduled to increase to 80% in February next year but has deferred this. The BOK expects this measure to reduce the collateral burden on financial institutions by 7.5 trillion won.

The BOK reiterated, "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 emphasized, "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 this does not contradict the current monetary policy stance."

It added, "These measures do not conflict with Governor Lee Chang-yong’s parliamentary response that while financial stability special loans or the reactivation of the Special Purpose Vehicle (SPV) could be discussed later, they are not appropriate policies to implement at this time."

Meanwhile, the meeting did not approve large-scale liquidity supply methods such as financial stability special loans or the reactivation of the SPV.

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