BOK to provide emergency liquidity using loans as collateral in case of large-scale deposit withdrawals
Bank of Korea Gov. Rhee Chang-yong, center, bangs the gavel to open a Monetary Policy Committee meeting at the central bank in Seoul, Nov. 27. Joint Press Corps
The Bank of Korea (BOK) said Sunday it has decided to provide emergency liquidity to financial institutions by accepting their loan assets as collateral in the event of large-scale deposit withdrawals or other liquidity crises.
Under the new rule approved by the BOK Monetary Policy Board, the central bank will be able to offer additional emergency funding backed by loan receivables, if deemed necessary, in addition to its existing lending program collateralized by marketable securities.
Currently, the BOK provides funds only against marketable securities held by financial institutions when liquidity stress takes place.
"There have been rising liquidity risks due to the accelerating digitalization of finance, and the need to strengthen liquidity backstops has grown," the BOK said in a release.
Loans account for the largest share of financial institutions' assets, and using them as collateral can serve as an effective tool in responding to severe liquidity shocks, it added.
As of end-June, loans accounted for 69.8 percent of total assets by banks, compared with 18.6 percent for marketable securities.
The new rule is expected to take effect next month, and the BOK plans to conduct simulations and establish related systems to ensure rapid implementation during emergencies, officials said.