The Bank of Korea will introduce a system to provide emergency funds using loan claims held by financial institutions as collateral if a liquidity crisis hits financial markets due to large-scale withdrawals of deposits and other factors. The aim is to expand liquidity-supplying tools, previously centered on marketable securities, to strengthen crisis response.
The Bank of Korea's monetary policy committee on the 14th approved the Regulation on Emergency Lending Backed by Financial Institutions' Loan Claims. The Bank of Korea (BOK) currently operates a standing lending facility (reserve adjustment lending) using marketable securities such as Government Bonds held by financial institutions as collateral during liquidity crises, and the move establishes an institutional basis to add emergency lending backed by loan claims.
The Bank of Korea (BOK) said that as the digital transformation of finance accelerates and the likelihood of large-scale, short-term fund movements grows, it is necessary to strengthen the Central Bank's liquidity backstop function.
In particular, given that loan claims account for the largest share among banks' asset, the assessment is that using them would enable a more effective response to a severe liquidity crunch. As of the end of June this year, loan claims made up 69.8% of total bank assets, far exceeding marketable securities (18.6%).
Kim Beom-seo, head of the loan collateral planning team in the BOK's Monetary Policy Department, said, "If a support framework for lending backed by loan-claim collateral is established, it will help prevent market instability by allowing financial institutions to raise funds without hastily selling the securities they hold during a crisis." Central Banks in major economies, including the U.S. Federal Reserve (Fed), the Bank of England (BOE), and the Bank of Japan (BOJ), already use loan claims as eligible collateral.
To enable swift execution in a crisis, the Bank of Korea (BOK) plans to regularly collect information on loan claims from financial institutions and conduct eligibility screening and collateral valuation in advance. Specific terms such as eligible institutions, limits, interest rates, and maturities for emergency lending will be decided by resolution of the Monetary Policy Board when a crisis occurs.
Eligible collateral will initially be limited to loan claims on corporate borrowers' real estate–secured loans and unsecured loans with sound credit ratings (BBB- or higher, or a probability of default within 1.0%). The time to actual fund disbursement is expected to be about 2–3 business days for unsecured loan claims and about 5–7 business days for real estate–secured loans.
The Bank of Korea (BOK) also plans to build a support framework to enable swift assistance in a crisis through simulation drills when necessary. The BOK will complete advance preparations, including tests of IT systems with financial institutions, by year-end and implement the system starting Jan. 2 next year.