Lee Chang-yong "High interest rates will persist for a long time... Financial stability system must be improved"

Lee Chang-yong, Governor of the Bank of Korea, is speaking at the Monetary Policy Direction press conference held at the Bank of Korea in Jung-gu, Seoul on August 24.
[Image source=Yonhap News]

Lee Chang-yong, Governor of the Bank of Korea, said on the 5th, "There is a high possibility that the current high interest rate level will persist for a long time," and added, "We must properly organize related systems to ensure that liquidity can be supplied timely and sufficiently in the event of unexpected financial instability."

Governor Lee made these remarks at the 'Bank of Korea and Financial Society Joint Policy Symposium' held on the 2nd floor conference hall of the Bank of Korea annex in Seoul that day, stating, "Our financial and foreign exchange markets showed signs of instability just one year ago."

He explained, "At that time, rapid interest rate hikes and concerns over a downturn in the real estate market triggered instability in the real estate project financing (PF) market, causing market interest rates to surge. In response, the Bank of Korea swiftly implemented market stabilization measures, including liquidity support for securities firms, in close cooperation with the government."

He continued, "The Silicon Valley Bank (SVB) incident earlier this year posed a challenge to central bank policymakers worldwide on how to perform financial stability functions during a digital bank run. The Bank of Korea also started from this concern and announced a loan system reform plan last July."

Governor Lee pointed out, "In Korea, especially with the development of digital banking and social media, the possibility of sudden capital outflows is very high. However, looking at the current Bank of Korea loan system, the scope of eligible collateral securities is narrower compared to major countries, and there are limitations on liquidity support for non-bank deposit-taking institutions."

For example, the U.S. Federal Reserve (Fed) can respond to sudden capital withdrawals through its discount window lending that recognizes loan receivables as collateral, but according to Governor Lee, the Bank of Korea's measures in this regard are insufficient.

He explained, "In the past, the Bank of Korea actively operated funding support measures such as bill rediscounting, but during the financial liberalization process, the operation of this policy finance-type system was discontinued. Also, the existing Bank of Korea standing loan system was limited in use due to concerns about stigma effects."

Considering these points, he said, "The Bank of Korea strengthened its role as a liquidity safety net by significantly expanding the loanable resources of deposit-taking institutions through reforms of the standing loan system, including expanding eligible collateral securities and lowering loan spread rates," and added, "We plan to continue to supplement current institutional and practical constraints and promote these reforms in consultation with the Monetary Policy Committee."

However, Governor Lee emphasized, "We must also consider ways to reduce side effects such as moral hazard during this process," and stressed, "Especially, for the central bank to perform its role as the lender of last resort, continuous monitoring is necessary to distinguish whether the issue is liquidity or solvency."

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