Bank of Korea Expects Reduced Bank Liquidity Management Burden Through Loan System Reform

Bank of Korea, September Monetary and Credit Policy Report

The Bank of Korea mentioned that it expects the liquidity management burden on deposit-taking institutions to be alleviated following the reform plan of the Liquidity Adjustment Loan System, which was approved in July to expand liquidity support.

On the 14th, the Bank of Korea announced this in the 'Details of the Bank of Korea Loan System Reform and Future Plans' section of the Monetary and Credit Policy Report.

The Liquidity Adjustment Loan System allows banks to borrow funds from the Bank of Korea to cover shortages arising during liquidity adjustments, serving as a safety net for short-term liquidity shortages.

The Bank of Korea explained that the existing system "had a narrowly defined eligible collateral range, limited usage frequency due to concerns about negative perceptions associated with using the loan system, and was restricted to banks only, limiting its utilization." Therefore, it decided to reform the Liquidity Adjustment Loan System by expanding the eligible collateral range, lowering the loan interest rate, and extending the maximum possible loan maturity.

The eligible collateral range was made permanent for bank bonds and bonds issued by nine public institutions, which had been temporarily expanded, and newly included bonds issued by other public institutions, local government bonds, and high-quality corporate bonds. To minimize loss risks, risk management measures were also established. The loan interest rate spread was lowered by 50 basis points, and the maximum extendable loan maturity was increased from one month to three months.

The Bank of Korea stated, "With this reform, deposit-taking institutions will be able to access the Bank of Korea's loan system more flexibly when experiencing temporary liquidity shortages, and the liquidity management burden is expected to be reduced. Going forward, we will promote measures to include loan claims of deposit-taking institutions as eligible collateral to supply sufficient liquidity in a timely manner and prevent financial market instability caused by market sell-offs."

For banks, the plan will be implemented after a preparation period of about one year and approval by the Monetary Policy Committee. For non-bank deposit-taking institutions, the inclusion of loan claims will be reviewed after institutional conditions such as joint inspections and data submission requirements are established.

Regarding support measures for non-bank deposit-taking institutions, the Bank of Korea said, "If a major deposit withdrawal incident or a high likelihood of such an event causes significant difficulties in liquidity procurement for non-bank institutions, a prompt decision will be made on whether to provide liquidity support to their central associations." It added, "In such cases, the expanded eligible collateral range of the Liquidity Adjustment Loan System will be applied equally, and to ensure swift decisions, we will strengthen regular information sharing with supervisory authorities."

Bank of Korea Governor Lee Chang-yong is delivering opening remarks at the Bank of Korea loan system reform direction press briefing held on July 27 at the Bank of Korea in Jung-gu, Seoul.
[Photo by Yonhap News]

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