[Asia Economy Reporter Eunbyeol Kim] The Bank of Korea has decided to extend the 'Financial Stability Special Loan System,' which allows banks and securities and insurance companies to borrow loans using high-quality corporate bonds they hold as collateral, for an additional three months. Although no financial institutions have actually taken out loans using this system so far, the system will be maintained due to the ongoing COVID-19 crisis and continued market instability.
At its meeting on the 29th, the Bank of Korea's Monetary Policy Committee resolved to extend the operation of the 'Financial Stability Special Loan System,' which provides loans for up to six months using high-quality corporate bonds (AA- or higher) issued by general companies as collateral, until February 3, 2021. The total loan limit is 10 trillion won.
This system serves as a 'safety measure' to prepare for situations where financial companies face difficulties in raising funds during a crisis. When eligible corporate bonds are provided as collateral, borrowing from the Bank of Korea is possible at any time. The collateral target is high-grade (AA- or higher) corporate bonds with a remaining maturity of up to five years issued by general companies. The loan interest rate is set at the rate of Monetary Stabilization Bonds (182-day maturity) plus 0.85 percentage points.
The Bank of Korea first implemented this system in May, initially planning to operate it temporarily for three months until August. At the end of July, the operation period was extended for the first time by three months, and this is the second extension.
A Bank of Korea official stated, "The COVID-19 crisis continues, and uncertainty in financial and economic conditions remains high. Recently, as COVID-19 has resurged in the U.S. and Europe, with talks of restricting economic activities, we decided to continue the system to prepare for the possibility of emergency situations."
Last night, U.S. and European stock markets plunged together amid concerns that the global economy would again follow a downward curve due to the COVID-19 situation. On the 28th (local time), the Dow Jones Industrial Average in New York closed at 26,519.95, down 943.24 points (3.43%) from the previous session, and the S&P 500 index ended at 3,271.03, down 119.65 points (3.53%).
The FTSE 100 index of the London Stock Exchange closed at 5,582.80, down 2.6% from the previous trading day, and the DAX 30 index of the Frankfurt Stock Exchange ended at 11,560.51, down 4.2%. The German stock market hit its lowest level since the end of May.
This is the second time since the foreign exchange crisis in December 1997 that the Bank of Korea has provided loans to financial institutions other than banks to ease financial market tightening. At that time, the Bank of Korea lent 2 trillion won and 1 trillion won to Korea Securities Finance and the Credit Management Fund, respectively. However, this is the first time that corporate bonds have been accepted as loan collateral.
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