South Korea’s central bank said Thursday that its policymakers have approved measures to help boost its capacity to supply liquidity into the country’s financial system and promote financial stability.
After holding a policy meeting, the monetary policy committee of the Bank of Korea has decided to supply intra-day funds to brokerage houses and to expand the scope of its open market operations, according to the central bank.
The BOK said it will be able to provide temporary funds to securities firms to help them tackle a short-term shortage of funds in settlements. Currently, only banks are allowed to receive intra-day funds from the central bank.
The method of the BOK’s open market operations will also expand as the central bank will be allowed to borrow or lend securities for its repurchase agreement operations.
“The move will give the BOK an additional tool to flexibly adjust liquidity in the financial system and stabilize the bond markets when a credit crunch crops up,” Lim Hyung-joon, head of the BOK’s market operation team, told reporters.
Currently, the BOK is only allowed to buy or sell securities to control liquidity in the financial system through a repurchase agreement. A repurchase agreement is a deal whereby one party sells the other a security at a specified price with a commitment to buy the security back at a later date.
Under the new system, the BOK can borrow treasuries from insurers or pension funds, adding to its ammunition for open market operations. The central bank holds government bonds worth of 15 trillion won ($13 billion).
When financial institutions experience difficulty in securing funds in the market, the BOK will be able to lend treasuries to financial firms after taking risky securities on collateral from them.
The move came as parliament on Aug. 31 passed a law aimed at beefing up the role of the BOK in coping with financial instability, setting the stage for the central bank to play a role in preventing a potential financial crisis. The law will go into effect on Dec. 17.
