Bank of Korea Collects Funds, Securities Firms End Loans... Second Suspension of COVID-19 Special Measures (Comprehensive)

Direct Loans by Securities and Insurance Companies End from February 3... Currently '0 Cases' of Loans

[Image source=Yonhap News]

[Asia Economy Reporter Kim Eunbyeol] The Bank of Korea has decided to discontinue direct lending to securities and insurance companies, an unusual measure implemented after the outbreak of the novel coronavirus infection (COVID-19). Although the spread of COVID-19 continues, the financial market is showing signs of stability, leading to the judgment that lending to non-bank financial institutions is unnecessary.

It is significant that the Bank of Korea has stopped one of the special measures implemented during the COVID-19 crisis and has begun to withdraw funds. Following the suspension of the unlimited repurchase agreement (RP) purchase system in July last year, this is the second time the Bank of Korea has discontinued a special COVID-19 measure.

On the 28th, the Bank of Korea's Monetary Policy Committee announced, "We have decided to terminate the operation of the Financial Stability Special Lending Facility as scheduled on February 3, 2021."

The Financial Stability Special Lending Facility is a standby credit system that allows borrowing from the Bank of Korea at any time by providing eligible corporate bonds as collateral. It was newly established on May 4 last year. At the time of introduction, it was operated temporarily for three months within a limit of 10 trillion won, with plans to decide later on extension and increase based on financial market conditions and limit exhaustion. It has since been extended twice.

The institutions eligible for loans secured by corporate bonds included 39 banks, 15 securities companies, 6 insurance companies (with capital of 3 trillion won or more), and 61 financial companies such as Korea Securities Finance Corporation.

When the Bank of Korea implemented the Financial Stability Special Lending Facility last year, it was considered an unusual move in the market. Although the Bank of Korea supported secondary financial institutions through Korea Securities Finance Corporation during the 1997 Asian financial crisis, direct lending was implemented for the first time after the COVID-19 outbreak. During the Asian financial crisis, 3 trillion won was provided to support financial companies through Korea Securities Finance Corporation (2 trillion won) and the Credit Management Fund (1 trillion won).

However, unlike in March, the early stage of COVID-19, the market calmed rapidly afterward, and with the KOSPI index surpassing 3100 and domestic and international stock markets showing strength, there was no longer a reason for secondary financial institutions to borrow from the Bank of Korea. To date, there have been zero cases of using the Bank of Korea's Financial Stability Special Lending Facility.

A Bank of Korea official stated, "This decision was made considering that the financial market is generally stable recently, liquidity conditions of financial institutions such as securities companies are favorable, and the corporate bond and CP purchase vehicle (SPV) is operating." However, the official added, "Even though the operation of the Financial Stability Special Lending Facility is terminated this time, if the financial market becomes unstable again in the future, we may consider resuming this facility."