Bank of Korea should take swifter and bolder actions

The Bank of Korea has pledged unlimited liquidity to financial institutions for the next three months. In an effort to address tight liquidity conditions, the South Korean central bank intends to implement an unlimited takeover of repurchase paper (RP) from financial institutions to improve market liquidity. Such an unprecedented program was not done by the central bank, even in the aftermath of the 1997 Asian financial crisis and the 2008 global financial crisis. It is expected to help businesses overcome a short-term liquidity crisis.

Nevertheless, there is still criticism in the market that the Bank of Korea should make a more aggressive and nimble decision. Critics say that the South Korean central bank shuns its responsibilities, different from central banks in the United States, Japan and European countries which have aggressively bought in commercial paper (CP). Particularly, the Federal Reserve has announced a series of new plans day after day including a program to create a special-purpose vehicle to purchase corporate bonds and commercial paper. The European Central Bank, the Bank of England and the Bank of Japan alike have purchased corporate bonds. Such a direct support package can make a greater and faster difference than South Korea’s indirect scheme via financial institutions in preventing against corporate insolvency.

Regarding such criticism, the Bank of Korea has responded in a disapproving tone that it is against the Bank of Korea Act to purchase corporate bonds, adding that a consequent loss will be sustained by Korean citizens. To be sure, the central bank can see the negative effects of a provision of the South Korean won in large quantities, unlike key currencies such as the U.S. dollar. Nevertheless, even financial experts within the central bank point out that it is only a lame excuse given that the Bank of Korea Act was amended in 2011 to resemble the Federal Reserve Act. They argue that the South Korean central bank is not aggressive enough being held back by rigid corporate culture and self-protectionism, different from other central banks bent on finding a cure to financial market insecurity.

Since the COVID-19 outbreak occurred, the Bank of Korea has never been a nimble action-taker. It cut the interest rate over a month after a drop in the economy was witnessed. A South Korean version of “quantitative easing” was released belatedly with liquidity risks already escalating over the financial market. By contrast, the Fed has been a few steps ahead of the U.S. government. For instance, just a week after concerns grew over the coronavirus pandemic, the Fed decreased its benchmark interest rate by 0.5 percentage point. Around a dozen days later, it cut the rate again by one percentage point. Also, it took further step by promising to purchase limitless quantities of government bonds possessed by financial institutions, from a previously announced package deal to buy four trillion dollars’ worth of them, which failed to mitigate market insecurity.

The Bank of Korea said that the ball is in the government’s court, saying that it may purchase corporate bonds if the government guarantees. However, it has to be accompanied by consent of the National Assembly. There is a long list of things that the central bank can do such as purchasing long-term government and national bonds apart from corporate bonds. The South Korean central bank, which is entitled with independent authority and capability, has to take nimble action with a greater sense of responsibility for both the financial market and the real economy.