Government Provides Additional Liquidity... Evidence That Funding Market Tightness Persists

Banking Sector Fund Concentration Also a Problem

Deputy Prime Minister and Minister of Economy and Finance Choo Kyung-ho, along with heads of financial authorities, are taking a commemorative photo before the Emergency Macroeconomic and Financial Meeting held on the 28th at the Bankers' Hall in Jung-gu, Seoul. From the left, Choi Sang-mok, Senior Secretary for Economic Affairs; Lee Chang-yong, Governor of the Bank of Korea; Deputy Prime Minister Choo; Kim Joo-hyun, Chairman of the Financial Services Commission; Lee Bok-hyun, Governor of the Financial Supervisory Service. Photo by Kim Hyun-min kimhyun81@

[Asia Economy Reporter Seo So-jeong, Sejong=Reporter Son Seon-hee] The government is conducting an additional capital call of 5 trillion won for the Bond Market Stabilization Fund and providing liquidity support to stabilize the capital market because the short-term funding market squeeze has not yet been resolved. The impact of the base interest rate hike, which has caused funds to flock to the banking sector, is also acting as a difficulty as funding conditions are becoming differentiated by industry.

First, to stabilize bond market supply and demand, the government has decided to significantly reduce the issuance volume of government bonds in December. Following the so-called ‘Legoland incident’ shock in September, the bond market still shows instability, so to ease market burden, the government will cut the planned issuance of government bonds next month from 9.5 trillion won to less than half, 3.8 trillion won. Since there were criticisms that ultra-high-quality public bonds such as Korea Electric Power Corporation and Korea Gas Corporation absorb large-scale market funds, public institutions plan to adjust supply and demand through volume reduction, timing dispersion, and conversion to bank loans.

Additionally, to improve market and corporate liquidity, the purchase capacity of policy support programs such as the Bond Market Stabilization Fund and corporate bond/commercial paper (CP) purchase programs will be further expanded. Following the first capital call of 3 trillion won for the Bond Market Stabilization Fund, the government decided to proceed with a second capital call of 5 trillion won, which will be implemented in installments from next month to January next year to reduce the burden on contributing financial companies.

The Bank of Korea will provide up to 2.5 trillion won in liquidity support to 83 financial companies participating in the second capital call. The support amount per participating financial institution will be within 50% of each institution’s contribution, and the decision on refinancing will be made every three months considering the improvement of market conditions. Bank of Korea Governor Lee Chang-yong said, "Routine repurchase agreement (RP) purchases will proceed normally until the end of the year and can be increased if funds concentrate," adding, "The RP purchases by companies contributing to this Bond Market Stabilization Fund are liquidity support policies secured by collateral without credit risk, so they do not conflict with the Bank of Korea’s interest rate hike stance."

The corporate bond and CP purchase programs by the Korea Development Bank, Industrial Bank of Korea, and Korea Credit Guarantee Fund announced last month, as well as securities company CP purchases and securities/construction company guaranteed project financing (PF) asset-backed commercial paper (ABCP) programs, will be executed more swiftly. The 1.8 trillion won securities company guaranteed PF ABCP purchase program began purchases on the 24th, and the 1 trillion won construction company PF ABCP purchase program will start purchases from this week.

A total of 20 trillion won worth of real estate market stabilization measures will also be promoted. From January 1 next year, the guarantee scale for real estate PF preparing for pre-sale after approval will be expanded from the existing 10 trillion won to 15 trillion won, and a new 5 trillion won unsold PF loan guarantee will be established. Guarantee eligibility requirements will also be relaxed, including the removal of loan interest rate limits. This policy was originally planned to be implemented around February next year, but due to the interest rate hike causing a more severe real estate market squeeze than expected, it was advanced by about a month. The government also announced additional easing of real estate regulations within the year, such as ‘restructuring the registered rental business system’ and ‘improving reconstruction safety inspections.’

Deputy Prime Minister and Minister of Economy and Finance Choo Kyung-ho emphasized, "There are major events remaining until the end of the year, such as inflation indices and interest rate decisions in major countries, and recent collective transport refusals by the Cargo Solidarity have intensified difficulties in our economy," adding, "We will closely monitor market trends and year-end and New Year risk factors and respond with full force to stabilize the capital market."

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