$12 billion of the dollar swap to flood market this week

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$12 billion of the dollar swap to flood market this week

The Bank of Korea will be lending $12 billion of the $60 billion currency swap signed with the United States earlier this month, flooding the system early and fast to prevent the markets from seizing up for the lack of dollars.

An auction for this first round of funding will be held Tuesday, and a total of $10 billion with 84-day maturity and $2 billion at seven days will be made available.

For the 84-day funding, minimum bids are $100 million, and the cap is $1.5 billion. For seven-day funding, the maximum is $300 million.

The interest rate on the dollar loans will be announced today.

Supplying much-needed dollars to the system is expected to help stabilize the financial markets, which have been roiled by the coronavirus outbreak. The $12 billion being added is three times the $4 billion that was added in the first round of disbursements following a swap agreement with the United States in 2008.

The central bank said the size of the first round dollar supply was determined based on the country’s trade finance and short-term foreign exchange situation.

Korea was among the nine countries that reached a currency swap deal with the U.S. Federal Reserve on March 19.

Among those nine countries, six signed $60 billion deals, while the other three - Denmark, Norway and New Zealand - signed $30 billion deals.

The swap agreements expire on Sept. 19.

Funds have been supplied in such abundance this time around because the market has increased in size, the central bank said. It added that it expects the infusion of the dollars into the system will help stabilize the markets.

News of the coronavirus pandemic worsening in Europe and rapidly spreading in the United States have shaken the financial markets both at home and abroad.

To make loans more accessible for business, the regulators will implement a new bank capital rule a year and a half earlier than expected.

The Financial Services Commission (FSC) and the Financial Supervisory Service on Sunday said the Basel III will be applied starting in the second quarter instead of 2022.

According to the FSC, the new rules will reduce the need for capital when making loans to small- and medium-sized businesses. At present, small businesses applying for loans must be 100 percent risk weighted. As they lack strong and deep credit histories, banks must fully reserve against those loans.

Under the Basel III, that risk weighting is eased to 85 percent. This will allow banks to lend more.

Under the new rule, companies with no credit score and no collateral will have better access to bank loans.

The loss given default (LGD) on unsecured loans to small businesses without collateral will be lowered. The LGD ratio on unsecured loans will be lowered from 45 percent to 40 percent.

If real estate is put up as collateral, the ratio is lowered from current 35 percent to 20 percent.

BY LEE HO-JEONG [lee.hojeong@joongang.co.kr]
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