The Bank of Korea’s role expansion is drawing more and more attention as the COVID-19 pandemic is seriously affecting the South Korean economy. Experts are calling for the central bank to supply funds directly to enterprises as the Fed of the United States and the Bank of Japan do.
The Bank of Korea is planning to take part in the government’s bond market stabilization fund, which is scheduled to be announced on March 24 and estimated to have a size of at least 10 trillion won, by shouldering about half of the liquidity. The government is going to help purchase CPs as well as debentures by using the fund. The central bank’s liquidity support is likely to take the form of RP purchase and indirect fund supply to financial companies investing in the fund.
In addition, the Bank of Korea is going to conduct additional RP purchase on March 24 for non-bank institutions such as securities companies and expand the scope of securities subject to RPs. Bank debentures and special bonds of public enterprises are expected to be included in the securities accepted as collaterals when the central bank provides loans for banks.
Still, there is a criticism that the measures are conventional and indirect ones insufficient for credit market stabilization and the central bank already took the same measures during the 2008 global financial crisis. More and more are saying that what is required now is the issuing authority of the bank for direct fund supply with the pandemic starting to deteriorate the profitability of enterprises and the real economy and signaling a series of bankruptcies and layoffs.
The Fed already launched a US$1 trillion CP purchase program and is considering providing US$4 trillion liquidity loans for companies. The Bank of Japan increased its CP and debenture purchase ceilings from 2.2 trillion yen to 3.2 trillion yen and from 3.2 trillion yen to 4.2 trillion yen on March 16, respectively. In addition, the central bank of Japan doubled its annual ETF purchase target to 12 trillion won.