Central bank to loan directly to brokerages

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Central bank to loan directly to brokerages

The Bank of Korea is lending money for the first time ever directly to brokers and insurers.

It will make available up to 10 trillion won ($8 billion) to these institutions as well as banks over the next three months to prevent a liquidity crunch and a loss of confidence.

The new policy, which is effective May 4, was announced Thursday after an extraordinary meeting.

Under the terms of the program, banks, brokerages and insurance companies will be able to borrow money for up to six months from the central bank. They will have to pledge bonds rated AA- or above as collateral.

The borrowing cost will be the rate for the 182-day Monetary Stabilization Bonds plus 85 basis points. As of Tuesday, that bonds yields was 1.54 percent.

“The latest measures will promote stabilization in the corporate bond market as well as improve liquidity at financial institutions,” the bank said in a release.

“It is a safety net against any possible emergencies. The standing lending facility will also be effective in relieving anxiety in the market.”

Financial institutions will be able to borrow funds equalling up to 25 percent of their capital.

The measure is based on Article 80 of the Bank of Korea Act, which says the bank can offer credit to financial institutions when they have trouble borrowing on a commercial basis from other financial institutions.

The bank says that it may be hard to see the danger at the moment, but added that “if the Covid-19 impact extends, we cannot rule out the possibility of companies, banks and non-banking financial institutions having huge problems in delivering capital.”

As this is an extraordinary loan program, the central bank will engage in strict follow-up management.

Institutions taking the loans will have to submit reports on their business and financial stability. If their finance condition deteriorates, the bank said it would tighten the credit line or cancel the loan altogether.

The central bank has been actively rolling out measures to contain the pandemic’s impact on the financial economy.

After cutting the base rate by 50 basis points to a historic low of 0.75 percent in early March, the central bank committed to an unlimited repo program running from April to June. That was also a first for the central bank, which stopped short of such extreme measures in past financial crises.

Last week, the bank added special bank bonds and mortgage-backed securities to the list of securities it can purchase to boost liquidity in the financial market.

BY JIN EUN-SOO [jin.eunsoo@joongang.co.kr]
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