Reasons for Bank of Korea's Loan System Reform... Monetary Policy Committee: "Existing System Has Limits in Supporting Bank Runs"

Lee Chang-yong, Governor of the Bank of Korea, is attending the Monetary Policy Committee plenary meeting held at the Bank of Korea in Jung-gu, Seoul, on the 13th of last month. Photo by Kang Jin-hyung aymsdream@

Members of the Monetary Policy Committee (MPC) of the Bank of Korea (BOK) have assessed that the existing lending system of the BOK has limitations in supporting financial institutions facing concerns of a 'bank run' (massive deposit withdrawals).

According to the minutes of the 14th MPC meeting of 2023, released by the BOK on the 16th, the MPC members stated at the meeting held on the 27th of last month, "In light of incidents such as the U.S. Silicon Valley Bank (SVB) crisis, the possibility of widespread large-scale deposit withdrawals has increased under the digital banking environment."

Earlier, on the 27th of last month, the BOK MPC approved a reform plan for the lending system. This plan involves the BOK promptly providing liquidity support in cases where non-bank deposit-taking institutions such as Saemaeul Geumgo, Nonghyup, Suhyup, Shinhan Credit Cooperatives, and mutual savings banks face large-scale deposit withdrawal incidents or urgent funding issues.

The scope of eligible collateral securities for loans was also expanded from the existing government bonds, Monetary Stabilization Bonds, government-guaranteed bonds, credit securities, mortgage-backed securities (MBS), special bank bonds, and bank bonds to include public bonds, local government bonds, as well as high-quality corporate bonds with an investment-grade credit rating (AA- or higher).

Through this reform, the BOK explained that in emergencies, banks could secure liquidity of 90 trillion won, and non-bank deposit-taking institutions could raise approximately 100 trillion won in liquidity.

The MPC minutes explain the reasons behind the BOK's preparation of this system reform plan.

The MPC members evaluated that "the current BOK lending system has limitations in providing funding support to deposit-taking institutions temporarily facing liquidity shortages," and "especially, the scope of eligible collateral securities for BOK loans is set narrower compared to major countries, and there are significant restrictions in supporting non-bank deposit-taking institutions."

Accordingly, the MPC members expressed the opinion that it would be preferable to reform the fund adjustment loan system, which is the BOK's regular lending system for banks, to reduce the stigma effect on banks and improve accessibility to the BOK lending system.

Additionally, the MPC members mentioned the need to explore measures to fundamentally alleviate liquidity risks within the financial system in the future, such as adding loan claims of deposit-taking institutions to eligible collateral for loans, similar to major countries.

However, regarding non-bank deposit-taking institutions, they suggested that it would be better to review the inclusion of loan claims in the eligible collateral scope after conditions such as joint inspections and data submission requirements are established.

Furthermore, the MPC members agreed on applying a collateral scope equivalent to that for banks when lending to non-bank deposit-taking institutions, and shared the recognition that the BOK needs to strengthen information sharing with supervisory authorities to make swift liquidity support decisions for these institutions.

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