Bank of Korea jumps in to stabilize debt markets post-Legoland

Finance

Published: 27 Oct. 2022, 16:16

Bank of Korea jumps in to stabilize debt markets post-Legoland

The Bank of Korea Gov. Rhee Chang-yong speaks to reporters in central Seoul on Oct. 26. [NEWS1]

The Bank of Korea is taking bold steps to help stabilize the financial markets, in particular bonds unsettled by a default connected to Legoland Korea Resort.

The various adjustments and interventions, announced Thursday, come as governments and monetary authorities globally fight a desperate battle to keep rising interest rates from leading to a complete freeze in the debt and credit systems needed to keep economies funded and running.

Korea's bond market has been especially under stress since the default earlier this month of a company used for the financing of Korea Legoland Resort's development, and authorities have been scrambling ever since to get ahead of the problem.

Starting Nov. 1, the central bank will expand the types of bonds it takes in as collateral. Bonds issued by banks and public institutions will qualify from that date. Currently, only debt with the highest credit ratings are accepted.

With a wider range of bonds accepted, banks will be able to maintain their holdings of state bonds and monetary stabilization bonds required for over-the-counter derivative transactions, said Moon Dong-gyu, a spokesperson for the Bank of Korea.

The Bank of Korea will also be activating 6 trillion won ($4.23 billion) in repurchase agreements, a form of short-term borrowings for dealers in government securities, through Jan. 31. Brokerage firms will be able to raise much-needed cash with these facilities.

The Bank of Korea said the measure won’t increase the money supply, as “a similar volume of repurchase agreements will be signed with banks,” said Kang Eui-jun, a spokesperson for the bank.

Stabilization measures also include a delay in the change in the amount of securities that must be kept at the central bank to cover the risk of interbank transfers. That number, now 70 percent of the amount transferred, was to be taken to 80 percent in February next year.

The bank will keep the number at 70 percent until April.

Also on Thursday, the Financial Services Commission said it will temporarily adjust the loan-deposit ratio to 105 percent from the current 100 percent for banks and to 110 percent from current 100 percent for savings banks.

With the adjustments, loans will be easier to make and competition for deposits will be less intense, it said.

BY JIN MIN-JI [jin.minji@joongang.co.kr]