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Bank of Korea Considers Providing Direct Loans to Non-bank Financial Companies
To Stabilize Corporate Bond Market
Bank of Korea Considers Providing Direct Loans to Non-bank Financial Companies
  • By Yoon Young-sil
  • April 3, 2020, 10:50
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Bank of Korea Governor Lee Ju-yeol

The Bank of Korea announced that it might consider providing loans for non-bank financial institutions, in accordance with Article 80 of the Bank of Korea Act, for corporate bond market stabilization in the event of further deterioration of market conditions.

According to the article, the central bank can provide credit for for-profit enterprises, based on a resolution of the Monetary Policy Committee, when it is or is likely to be extremely difficult for them to procure money from financial institutions.

The central bank also announced that such loans, if any, would be provided within the scope of its authority stipulated in the act and would not be special favors for certain enterprises. “We are anticipating that corporate bond redemption will be smoothly carried out for a while based on the government’s bond market stabilization fund and our repurchase agreement purchase,” it added.

The Bank of Korea invoked the article for for-profit enterprises only once in history. It was during the 1997 Asian financial crisis, when the bank gave a two trillion won loan to Korea Securities Finance and a one trillion won loan to Korea Non-Bank Deposit Insurance Corporation for liquidity support in response to merchant bank and call market contraction.

The central bank is currently engaged in quantitative easing based on RP purchase, and yet the effect of the liquidity supply limited to bonds with high credit ratings has been called into question. However, trading of commercial papers and debentures with lower credit ratings is expected to be facilitated if the credit crunch in the debenture and commercial paper markets continues and the central bank begins to respond to the crunch by giving loans directly to securities and securities finance companies.