The Bank of Korea Supplies 5.25 Trillion Won to Financial Sector via RP Purchases on the 2nd
[Asia Economy Reporter Eunbyeol Kim] On the 2nd, the Bank of Korea supplied 5.25 trillion won to the financial sector through repurchase agreement (RP) purchases, stating that setting the subscription rate lower than the base rate is not desirable.
On this day, the Bank of Korea decided the subscription rate at 0.78%, considering various yields such as the 91-day Treasury bond average yield from three companies, the final bid yield, the average rate of previous RP purchases, and securities firms' RP funding rates. This is 0.03 percentage points higher than the base rate (annual 0.75%).
A Bank of Korea official said, "There are criticisms in the financial sector that the RP purchase subscription rate is high, but if the RP purchase rate (loan rate nature) is set lower than the sale rate (borrowing rate nature), the Bank of Korea would incur a negative margin."
RP sales and purchases within 7 days all use the base rate as a fixed rate, but considering the term premium, it is judged inappropriate for the 91-day RP purchase rate to be lower than the 7-day RP sale rate (base rate). A Bank of Korea official said, "Just as commercial banks do not lend at a negative margin, it does not make sense for the central bank to lend to commercial banks at a negative margin."
The Bank of Korea also expressed concerns that if the RP purchase rate is set lower than the RP sale rate, the bidding scale could become excessively large. To overcome the crisis caused by the novel coronavirus infection (COVID-19), unlimited liquidity supply to the market was decided, but there is criticism that financial institutions might focus solely on interest rate arbitrage by raising funds at low rates to buy other bonds. Initially, the Bank of Korea decided to provide unlimited liquidity to enable the financial sector to participate in the government's COVID-19 measures.
A Bank of Korea official added, "If RP purchases are made below the base rate, there is concern that the market might misinterpret it as a signal for a base rate cut," and "Even during the 2008 financial crisis when the bond market stabilization fund was supported, the minimum subscription rate was the base rate at that time."
Meanwhile, the Bank of Korea supplied 5.25 trillion won to the financial sector through RP purchases on this day. The amount supplied this day is larger than the RP purchases on the 19th of last month (1 trillion won) and the 24th of last month (2.5 trillion won).
A Bank of Korea official said, "Since 3 trillion won of capital calls paid into the bond stabilization fund established by the government the day before will be injected through corporate bond purchases today, we expected the bid amount to exceed 3 trillion won," adding, "Besides the bond stabilization fund injection, some financial companies seem to have requested funds for internal reasons." However, the official added, "Since RP purchases will continue weekly, it is difficult to know whether fund requests exceeding expectations will continue." It was reported that among the 5.25 trillion won supplied this day, a larger portion was supplied to securities firms.
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