BOK to extend loans to brokerages in unprecedented move

South Korea’s central bank has decided to launch a new loan program for brokerages, temporarily broadening its range of collateral to corporate bonds, officials said Thursday.

The move aims to provide cushion for the local market, which has been struggling to deal with the economic fallout of the new coronavirus.

Under the program worth 10 trillion won ($8.1 billion), local brokerages and nonbanking financial institutions including brokerages and insurers will be allowed to borrow funds for up to six months against collateral from the Bank of Korea.

This marked the first time the BOK has decided to directly extend loans to nonbanking institutions.

Gov. Lee Ju-yeol, in a press briefing last week, suggested that such special loans could be considered as a safety measure, should the COVID-19 situations prolong further.

AA- rated corporate bonds will be received as collateral, at the rate of 85 basis points above that of 182-day Monetary Stabilization Bonds. As of Tuesday, interest rate for such loans stood at 1.54 percent. Specifically, corporate bonds issued by companies with AA- rating and above, with remaining maturities of five years or less, will be accepted.

“We have limited the collateral to high-grade corporate bonds as financial damages of the central bank would eventually lead to tax burden for the people,” the BOK said in a release.

The program will run for three months from May 4, after which the central bank will review on the necessity of an extension, depending on the state of the financial market and demand for funds.

By Jung Min-kyung (mkjung@heraldcorp.com)