"'Samo Eunhaengchae', Exclusion from Inclusion in BOK Eligible Collateral Securities"

Negative Perception Within Bank of Korea from the Start
Extension of Terms Under Review for Syndicated Bank Bonds and Public Institution Bonds

The Bank of Korea has halted discussions on whether to include privately placed bank bonds issued by private placement in the list of eligible collateral securities. The reason is that, with recent financial market instability somewhat alleviated, there is no longer a need to urgently accept privately placed bank bonds as eligible collateral securities. However, within the Bank of Korea, there was a strong negative perception from the beginning that this was a 'trick' by the financial sector, so this is effectively interpreted as a rejection. Nevertheless, the Bank of Korea has decided to consider extending the period for expanding the eligible collateral securities, which ends at the end of this month.

According to the Bank of Korea and financial authorities on the 3rd, the Bank of Korea was reviewing the addition of privately placed bank bonds as eligible collateral securities but recently stopped the discussions. Previously, in October last year, when concerns about liquidity tightening arose due to the 'Legoland incident,' the Bank of Korea decided to temporarily recognize bank bonds and bonds issued by nine public institutions, in addition to government bonds and Monetary Stabilization Bonds, as collateral when lending money to commercial banks. However, it was unclear whether bank bonds issued by 'private placement' rather than 'public offering' would also be recognized, which caused controversy.

In response, at the 'Monetary and Credit Policy Report' press conference in December last year, the Bank of Korea explained, "We will review whether bank bonds issued by private placement comply with the Bank of Korea Act and its intent and decide accordingly," adding, "We plan to make a decision as soon as possible within this year." However, no official decision has been made even after the year passed. Regarding this, a Bank of Korea official said, "The situation is fine now, so after discussing with the Financial Services Commission and the Financial Supervisory Service, we decided to just drop it," adding, "If necessary, we can bring it up again, but since bank public bonds are being issued, there is no need to use a loophole."

If financial market instability unexpectedly worsens in the future, discussions may resume, but given the strong negative perception inside and outside the Bank of Korea, it is expected to be difficult. Privately placed bank bonds are bank bonds issued by one bank and acquired by another bank. If the Bank of Korea recognizes these as eligible collateral securities, the bank issuing the bonds can secure funds from other banks, and the bank purchasing the bonds can obtain funding from the Bank of Korea using them as collateral. This allows commercial banks to resolve liquidity issues without affecting the corporate bond market.

However, since the bonds are bought and sold privately between banks, there is inevitably controversy over 'collusion.' According to the Bank of Korea Act, the Bank of Korea can accept securities designated by the Monetary Policy Committee as collateral for credit operations to financial institutions, and with the approval of at least four Monetary Policy Committee members, it can temporarily accept assets granted eligibility beyond the legally defined collateral. Nevertheless, the Bank of Korea has never recognized privately placed bank bonds as eligible collateral securities because it viewed the practice of banks procuring funds from each other in a 'reciprocal' manner as a 'trick' involving moral hazard.

However, the Bank of Korea plans to consider extending the period for expanding eligible collateral securities to include bank bonds and bonds issued by nine public institutions. Previously, the Bank of Korea temporarily expanded eligible collateral securities for loans, collateral securities for settlement of differences, and securities eligible for open market operations repurchase agreements (RP) for three months starting from November last year, so support will end at the end of this month. A Bank of Korea official said, "The liquidity support measures by the Bank of Korea have been very effective," adding, "Whether to extend the period will be discussed by the Monetary Policy Committee based on market conditions."

[Image source=Yonhap News]

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