The Bank of Korea to 'Prevent Bank Runs'... Providing Liquidity Support to Saemaeul Geumgo and Others

The Bank of Korea has decided to provide liquidity support not only to banks but also to central associations of non-bank deposit-taking institutions such as Saemaeul Geumgo and credit unions, considering the growing concerns of a 'bank run' (massive withdrawal of deposits) at financial institutions, including the recent Saemaeul Geumgo incident.

On the 27th, the Bank of Korea's Monetary Policy Committee announced that it has approved a reform plan for the lending system to strengthen the role of liquidity safety nets for deposit-taking institutions in preparation for the potential spread of large-scale deposit withdrawals in the digital banking environment, highlighted by incidents such as the U.S. Silicon Valley Bank (SVB) case.

Currently, the Bank of Korea's lending system has limitations in supporting deposit-taking institutions facing temporary liquidity difficulties during large-scale deposit withdrawals due to a narrower range of eligible collateral securities compared to major countries.

Accordingly, the Bank of Korea will first lower the applied interest rate for the standing lending facility, the Fund Adjustment Loan, for banks and expand the range of eligible collateral to strengthen financial stability functions.

The loan interest rate will be reduced from the existing 'base rate + 100bp' (1bp = 0.01 percentage point) to 'base rate + 50bp.' Additionally, the range of eligible collateral will be expanded to include nine public institution-issued bonds, bank bonds, local government bonds, other public institution-issued bonds, and high-quality corporate bonds, in addition to existing eligible collateral such as government bonds.

The expanded range of eligible collateral will also apply equally to intraday overdrafts, eligible collateral securities for settlement of net differences, and financial intermediation support loans.

The loan maturity will be extended from the existing 'extension within a maximum of one month' to 'extension within a maximum of three months.' This system reform will be implemented starting from the 31st of this month. The inclusion of local government bonds, other public institution-issued bonds, and high-quality corporate bonds as eligible collateral will take effect from the 31st of next month.

Under the current Bank of Korea Act, the scope of financial institutions is limited to banks, and the conditions applicable for providing funds to non-bank deposit-taking institutions are strictly set. Therefore, it is currently difficult to establish the same standing lending system for non-bank deposit-taking institutions as for banks.

Non-bank deposit-taking institutions include mutual savings banks, credit unions, Nonghyup, Suhyup, forestry cooperatives, and Saemaeul Geumgo.

In cases where there is a significant risk of funding problems from financial institutions for non-bank deposit-taking institutions, such as the recent Saemaeul Geumgo 'bank run' concerns, the Bank of Korea will decide on liquidity support for the central associations of these institutions as quickly as possible based on Article 80 of the Bank of Korea Act.

When lending to central associations of non-bank deposit-taking institutions, the same range of eligible collateral as for banks (Fund Adjustment Loan) will be applied.

Furthermore, to enable prompt liquidity support decisions for non-bank deposit-taking institutions, the Bank of Korea plans to strengthen frequent information sharing with supervisory authorities. In the future, the Bank of Korea will consider adding loan claims of deposit-taking institutions to the eligible collateral for lending.

Regarding the expansion of eligible collateral for banks to include loan claims, the Bank of Korea will review major legal and practical issues with related organizations and, after sufficient preparation time for related system improvements and IT system development, will implement the changes following approval by the Monetary Policy Committee.

The Bank of Korea explained, "For non-bank deposit-taking institutions, we will review whether to include loan claims in the eligible collateral range after institutional conditions for joint inspections and data submission requests are established to ensure that the Bank of Korea can sufficiently obtain information from these institutions."

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