Sung-Hwan Shin, Monetary Policy Board Member: "Non-bank Depository Institutions Should Be Included in Lending Facility... Revision of Bank of Korea Act Needed"

Reduction and Abolition of Quasi-Fiscal Credit Support Programs
Improvement of Goal and Performance Evaluation Framework... Preventing Moral Hazard
Conditional Policy Rate Outlook: Discussion on Extending Horizon and Introducing Dot Plot Method

"A revision of the Bank of Korea Act is necessary to include non-bank depository institutions as eligible participants in the lending facility."

Sung-Hwan Shin, Member of the Monetary Policy Committee at the Bank of Korea, made this statement on December 15 at a conference held at the Bank of Korea in Jung-gu, Seoul, under the theme "Tasks for Bank of Korea's Monetary Policy: Communication and Policy Tools." He was addressing the operational challenges of the Bank of Korea's lending facilities.

Sung-Hwan Shin, Member of the Monetary Policy Committee, Bank of Korea

Non-banks to be included in lending facility eligibility... Gradual reduction and abolition of quasi-fiscal credit support programs

The Bank of Korea has restructured its lending facilities for financial stability, shifting from emergency lending to permanent lending, and expanding eligible collateral to include public institution bonds and bank bonds, thereby strengthening the effectiveness of liquidity provision during crises. Shin stated, "Going forward, it is necessary to revise the Bank of Korea Act to recognize loan assets held by banks as eligible collateral for permanent lending and to include non-bank depository institutions with large deposit bases and high potential for systemic risk as eligible participants in the lending facility."

Shin also emphasized, "The Bank Intermediated Lending Support Facility should be established as a non-traditional monetary policy tool tailored to Korea's circumstances." He added, "To this end, programs targeting specific policy objectives should be reduced or abolished, while enhancing universality. In addition, the goal and performance evaluation framework for the lending support facility must be improved to prevent moral hazard."

In this regard, the Bank of Korea is considering several measures: ▲ introducing a new program, tentatively named 'SME Loan-Linked Support', to support credit supply across small and medium-sized enterprises and enhance operational efficiency; ▲ gradually reducing or abolishing quasi-fiscal programs such as trade finance support, new growth and job support, and temporary special support; and ▲ considering the expansion of regional SME support, taking into account the increasing disparity between the Seoul metropolitan area and other regions, long-standing fixed limits, and regional demand.

Forward guidance: Extending horizon from 3 months to 1 year and discussing the introduction of dot plot method

Shin explained that the "conditional policy rate outlook for the next three months," which has been provided by Monetary Policy Committee members since October 2022, will also be further refined. He stated, "We will work to refine forward guidance, balancing the market's demand for information and policy credibility, and strive to improve qualitative communication."

He added, "The market wants more specific information on the future path of interest rates, but if there is a divergence from the actual path, policy credibility could be undermined, so a cautious approach is needed. In particular, in an environment where economic forecast errors are frequent due to external uncertainties, it is essential for the market to understand that forward guidance is 'conditional' in order to maintain policy flexibility." He further explained that efforts will be made to enhance the transparency and predictability of monetary policy by advancing the methods of monetary policy communication going forward.

The Bank of Korea, noting that the current three-month outlook is shorter than the policy rate outlooks or dot plots provided by major economies, has been conducting simulations since July last year to extend the outlook horizon to within one year and to allow Monetary Policy Committee members (excluding the Governor) to present multiple forecasts (introducing a 1-3 dot plot method). Expanding the outlook horizon and introducing the dot plot method could improve the predictability of monetary policy by providing medium- to long-term rate forecasts and conveying both upside and downside risks to the rate outlook. However, there are also drawbacks, such as increased ambiguity due to a wider distribution of dots and the potential for discrepancies with the actual policy rate decisions.