Central bank plans 2.5-trillion-won repo purchase

The Bank of Korea is buying up to 2.5 trillion won ($1.87 billion) of repurchase agreements (repo) to help some financial institutions make their contributions to a market stabilization fund.

Finance Minister Choo Kyung-ho, center, and Bank of Korea Gov. Rhee Chang-yong, second from right, in a meeting held in central Seoul on Monday to discuss measures on stabilizing the financial market. [YONHAP]

The Bank of Korea is buying up to 2.5 trillion won ($1.87 billion) of repurchase agreements (repo) to help some financial institutions make their contributions to a market stabilization fund.

The 2.5-trillion-won measure is separate from a 6-trillion-won repo purchase program announced in October.

Central banks sell repos to absorb liquidity and buys them back to increase liquidity available in the market.

Monday's announcement is related to a Finance Ministry plan, also announced Monday, to conduct a 5-trillion-won capital call to fund a market stabilization fund, which is supported by financial firms. The repo purchases will help some smaller financial institutions meet their capital call obligations.

The program is expected to be activated in December or January, and that's when the capital call will be conducted.

The Bank of Korea raised the policy rate by a quarter percentage point on Nov. 24 to 3.25 percent, up from 0.50 percent in July 2021.

“Liquidity will be absorbed from financial institutions with a sufficient level of liquidity at a rate that is on par with the base interest rate,” said Kim Soo-young, a spokesperson for the bank's market operation team.

The central bank stressed in a statement that it will “immediately absorb the liquidity through open market operations, like through the sale of repurchase agreements."

Bank of Korea Gov. Rhee Chang-yong said during a press conference last week that the short-term financing market has still not recovered, citing it as one of the reasons the Monetary Policy Board went with a quarter percentage point instead of a half point.

The yield for commercial paper with 91-day maturity was 5.50 percent as of Friday, compared to 1.55 percent in the beginning of the year.

Finance Minister Choo Kyuhg-ho said that the ministry will seek to have state-run organizations, like Korea Electric Power Corporation and the Korea Gas Corporation, reduce their bond issuance or issue them over different time periods to stabilize the bond market. The ministry is leaning on banks to loan money to these companies so they don't flood the bond market with paper.

The repurchase agreement program announced by the central bank in October has only been partially utilized.

“Only around 2 trillion won has been activated. We activate the program when we receive requests from financial companies. But because we offer a rate slightly higher than the market rate, there haven’t been that many requests,” Kim added, “But we expect to receive more requests at the end of the year since financial condition grows volatile in that period.”

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