South Korea’s central bank’s unprecedented decision to extend loans to brokerages and other nonbanking institutions will help them avoid the worst amid an economic crisis brought on by the novel coronavirus, experts said Friday.
The Bank of Korea announced Thursday that it planned to launch a special loan program worth 10 trillion won ($8.1 billion), which would allow local banks, brokerages and insurers to borrow funds for up to six months against collateral from the central bank. The three-month program will begin May 4 and the collateral will include AA- rated corporate bonds, the BOK said.
The program is intended to prevent a liquidity crunch in the market in light of the current risks and to help nonbanking institutions resolve their financing issues. This marks the first time the BOK has decided to extend loans to brokerages and insurers in such a direct manner.
“With the government and the BOK’s support measures, the brokerage sector is expected to put the worst behind it,” Kim Hyun-ki, an analyst at Hyundai Motor Securities said in a Friday note.
“With eligible collateral, the BOK’s latest program is a standing lending facility operation, which allows flexible financing for financial institutions,” he added.
Brokerages were concerned about the possibility of a liquidity crunch due to a surge in margin calls on their derivatives and real estate project financing asset-backed commercial papers, but the BOK’s loan program will help them secure the much-needed liquidity, Han Kwang-yeol, an analyst at NH Investment & Securities, said.
The commercial paper market is often a key source of short-term financing to support the ongoing needs of firms and public authorities.
Industry watchers said the central bank’s latest measure could be expected to help brokerages cope with a liquidity crunch by issuing more commercial papers, while voicing hopes that the BOK would extend the program to asset-backed commercial papers. ABCPs hold higher risk compared with regular CPs, as they are backed by securities instead of promissory notes.
By Jung Min-kyung (email@example.com