Bank of Korea to 'Prevent Bank Runs'... Rapid Liquidity Support Also for Saemaeul Geumgo and Others (Comprehensive)

Liquidity Support for Saemaeul Geumgo with Funding Concerns
Preparing Loan System Reform Plans After US SVB Incident
Including Local Bonds as Eligible Collateral... Also Promoting Loan Claims

Going forward, the Bank of Korea (BOK) will swiftly provide liquidity support in the event of large-scale deposit withdrawals or urgent funding issues at non-bank deposit-taking institutions such as Saemaeul Geumgo, Nonghyup, Suhyup, Shinhyup, and mutual savings banks.

Additionally, the scope of collateral securities that banks pledge to the BOK for loans or settlement transactions will be expanded to include bonds issued by public institutions, bank bonds, local government bonds, and high-quality corporate bonds, with plans to further include bank loan receivables in the future.

Hong Kyung-sik, Director of the Monetary Policy Department, is speaking at the Bank of Korea's press briefing on the direction of the loan system reform held on the 27th at the Bank of Korea in Jung-gu, Seoul. Provided by the Bank of Korea [Image source=Yonhap News]

The BOK Monetary Policy Committee announced on the 27th that it has approved a loan system reform plan containing these measures to prepare for the possibility of widespread large-scale deposit withdrawals, highlighted by the recent Silicon Valley Bank (SVB) incident in the United States.

Currently, under the Bank of Korea Act, the scope of financial institutions is limited to banks, and the conditions under Article 80 of the Act, which can be applied to provide funds to non-bank deposit-taking institutions, are strictly set. Because of this, it is difficult for the BOK to promptly provide liquidity support when funding problems arise at non-bank deposit-taking institutions.

Considering this, the BOK will, in the future, decide as quickly as possible whether to provide liquidity support to the central associations of non-bank deposit-taking institutions such as Saemaeul Geumgo and mutual savings banks, based on Article 80 of the Bank of Korea Act, when significant funding difficulties occur or are likely to occur.

When lending to the central associations of non-bank deposit-taking institutions, the scope of eligible collateral will be applied similarly to that for banks (fund adjustment loans). The BOK also plans to strengthen real-time information sharing with supervisory authorities to enable swift decisions on liquidity support.

Hong Kyung-sik, Director of the BOK Monetary Policy Department, explained, "When discussing this plan with the government, we reached a consensus that the BOK will be fully provided with the necessary data," adding, "If needed, institutionalization will also be pursued."

Regarding concerns that liquidity support policies for non-bank deposit-taking institutions might increase moral hazard, he said, "This is not about supporting institutions with soundness issues, but about preventing market turmoil caused by spreading anxiety," and emphasized, "Regulation and supervision should be conducted to prevent moral hazard problems."

A Saemaeul Geumgo branch in downtown Seoul (not related to the article content). [Image source=Yonhap News]

The BOK will adjust the interest rates, eligible collateral scope, and maximum maturity of its existing Standing Lending Facility, the fund adjustment loan, to improve access to the central bank lending system and strengthen its financial stability function.

Currently, the BOK’s lending system has limitations in supporting deposit-taking institutions temporarily facing liquidity difficulties during large-scale deposit withdrawals due to a narrow range of eligible collateral securities compared to major countries.

First, the loan interest rate will be lowered from the current ‘base rate + 100 basis points (bp)’ (1bp = 0.01 percentage points) to ‘base rate + 50bp.’ Additionally, the eligible collateral scope will be expanded to include nine types of bonds issued by public institutions, bank bonds, local government bonds, other public institution bonds, and high-quality corporate bonds, in addition to existing eligible collateral such as government bonds.

The expanded eligible collateral scope will also apply to intraday overdrafts, eligible collateral securities for settlement transactions, and financial intermediary support loans.

The loan maturity will be extended from the current ‘extension within a maximum of one month’ to ‘extension within a maximum of three months.’ These system reforms will take effect from the 31st of this month. Inclusion of local government bonds, other public institution bonds, and high-quality corporate bonds as eligible collateral will begin from the 31st of next month.

In particular, the BOK plans to add loan receivables of deposit-taking institutions to eligible collateral in the future. Expanding the eligible collateral scope for banks to include loan receivables will undergo review of major legal and practical issues with related institutions, followed by institutional improvements and IT system development, with a preparation period of about one year before being approved by the Monetary Policy Committee and implemented.

The BOK stated that crisis situations like bank runs are more severe in the secondary financial sector, and regarding measures to support banks as well, explained, "Since the Bank of Korea Act defines financial institutions as banks only, it has facilitated funding support for banks," adding, "Because the secondary financial sector raises funds through banks, this will indirectly help them."

The BOK expects that this loan system reform will strengthen the role of banks in providing continuous liquidity support and have a significant liquidity support effect for non-bank deposit-taking institutions as well. The BOK anticipates a reduction in incidents like the recent Saemaeul Geumgo bank run.

The BOK forecasts that, due to the expansion of eligible collateral for banks, it will be able to provide an additional liquidity of about 90 trillion won through fund adjustment loans in emergencies such as deposit withdrawals.

Furthermore, for non-bank deposit-taking institutions, recognizing eligible collateral similar to banks will enable liquidity provision of approximately 100 trillion won, subject to Monetary Policy Committee approval if necessary.

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