BOK seeks prevention of a liquidity crisis in banking system

BOK Governor Rhee Chang-yong announces at a press conference held at BOK in Seoul on July 27. [Courtesy of BOK]

The Bank of Korea (BOK) will join the bandwagon of the world’s central banks adding liquidity protections by taking preventive measures to ensure abundant liquidity in the banking system.

As protections to ensure a stable level of liquidity in case of a sudden crisis, the measures include an expansion of collateral types that commercial lenders use for loans and liquidity support for non-banking institutions, such as the MG Korean Federation of Community Credit Cooperatives (KFCC).

The measures were unveiled by the central bank as part of its regulatory reform on loans on Thursday. Under the reform, asset types deemed as collateral when commercial lenders borrow funds from the central bank will include bank bonds, public-sector bonds, and even corporate debt of blue chips. The loan rate for lenders will be lowered to a 0.5 percentage point plus the reference rate from the previous formula of 1 percentage points plus the reference.

It represents the first alteration in the lending system in 25 years since the amendment of the BOK Act in 1998.

The central bank also plans to streamline its voting process and approval procedures to facilitate quick financial support for non-banking institutions. “The reform came at a time with a growing risk of a digital bank run, as evident in the collapse of U.S. Silicon Valley Bank,” said BOK Governor Rhee Chang-yong.