The Bank of Korea (BOK) bought a record 488 trillion won in repurchase agreements (RP) this year to inject money into the market. Analysts said liquidity tightened as Korean retail investors trading U.S. stocks sold won to buy dollars. The BOK supplies cash to the market by purchasing Treasury bonds and other assets held by banks and other financial institutions through RP purchases.
According to the Bank of Korea on the 31st, the BOK purchased a total of 488.3 trillion won in RPs this year. That is 4.6 times the 106.1 trillion won of RPs bought last year, when market liquidity tightened due to the effects of martial law. It is the largest amount since 2008, when the BOK began regularly conducting RP operations.
An RP purchase refers to the BOK buying securities held by financial institutions on the condition that they will be sold back after a certain period. As payment for the securities, cash-like deposits are supplied to financial institutions, expanding market liquidity. However, because the bonds must automatically be sold back when the contract period ends, the liquidity effect is temporary. The transaction period is typically within 14 days.
The BOK has conducted RP purchases whenever money became scarce in financial markets. In 2020, when the COVID-19 pandemic intensified, it purchased 4.23 trillion won, then reduced the amount to 4 trillion won in 2021 and 26.8 trillion won in 2022. However, it increased the amount again to 50.9 trillion won in 2023, when the corporate bond market tightened due to the Legoland crisis, and it surged to 106 trillion won last year, when martial law was declared, setting a record at the time. This year easily surpassed that record.
The surge in the BOK's RP purchases is attributed to an increase in individual investors' overseas stock investments. As Korean retail investors trading U.S. stocks withdrew won deposits and converted them into dollars to invest in overseas stocks, banks' won funds declined. Banks are required to keep 7% of their deposit balances at the BOK, and when withdrawals increase, it becomes difficult to meet that requirement.
In fact, according to the Korea Securities Depository (KSD) securities information portal (SEIbro), the net purchases of overseas stocks by residents this year reached $31,088.8 million, a record high. That far exceeds the level in 2021 ($21,861.7 million), when the overseas stock investment frenzy peaked.