The Bank of Korea (BOK) has recently announced a series of reforms to its standing lending facility, aiming to strengthen its role as a liquidity backstop and enhance the stability of South Korea’s financial system.
Under the new measures, the BOK’s monetary policy board has decided to lower lending rates for loans taken out from the facility. Previously set at 100 basis points above the base rate, the lending rates will now be reduced to 50 basis points. This adjustment is expected to make it easier for banks to access liquidity when needed, providing crucial support during times of financial stress.
Furthermore, the BOK will now accept additional types of bonds as collateral for loans taken out from the facility. This expanded collateral pool will increase the flexibility of banks in securing the necessary funds to meet their liquidity requirements. Additionally, the central bank has introduced an option to extend the maturities of loans, granting banks a longer repayment period for loans obtained through the standing lending facility.
The decision to implement these reforms stems from the need to prepare for the possibility of large-scale deposit withdrawals in the digital banking environment. Recent incidents, such as the U.S. Silicon Valley Bank incident, have underscored the potential risks and challenges associated with digital banking, including the potential for significant deposit outflows. By taking proactive measures, the BOK aims to mitigate these risks and reinforce the stability of South Korea’s banking sector.
In addition to the adjustments made for banks, the BOK has also addressed the liquidity needs of non-bank financial institutions. While these institutions are not eligible to access the standing lending facility under the Bank of Korea Act, the central bank has reiterated its commitment to providing swift decisions for liquidity support in case of any financial trouble.
The urgency for these reforms became evident when a local credit union faced customer withdrawals following reports of a rise in non-performing loans. This incident raised concerns about a potential liquidity shortage not only for the credit union but also for other financial institutions. The BOK’s response reinforces its commitment to maintaining market confidence and swiftly addressing any financial instability.
The reforms announced by the Bank of Korea will come into effect on July 31, 2023, allowing banks and non-bank financial institutions to benefit from the enhanced liquidity support measures.
Key Points to Note:
- The Bank of Korea has reformed its standing lending facility to strengthen its role as a liquidity backstop.
- Lending rates for loans taken out from the facility will be lowered from 100 basis points to 50 basis points above the base rate.
- Additional types of bonds will be accepted as collateral, expanding the range of eligible securities.
- Extended maturities will be allowed for loans obtained through the standing lending facility.
- The reforms aim to address potential large-scale deposit withdrawals in the digital banking environment.
- Non-bank financial institutions will receive swift decisions for liquidity support if needed.
- The changes will be effective from July 31, 2023.
The Bank of Korea’s proactive approach to strengthen its standing lending facility reflects its commitment to maintaining financial stability and resilience. By lowering lending rates, expanding collateral options, and extending loan maturities, the BOK aims to ensure sufficient liquidity is available to banks. These reforms will enhance the banking sector’s ability to withstand potential challenges, such as large-scale deposit withdrawals, especially in the increasingly digital banking landscape.
Reference: Bank of Korea tweaks lending facility to boost liquidity