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Economy

Ruling party calls for BOK's active role to aid COVID victims

Democratic Party urges Bank of Korea to buy loans receivable owed by small business owners

By Sep 09, 2021 (Gmt+09:00)

Democratic Party's floor leader Yoon Ho-jung speaks before a regular parliamentary session opens on Sept. 8
Democratic Party's floor leader Yoon Ho-jung speaks before a regular parliamentary session opens on Sept. 8

South Korea's ruling Democratic Party has called on the Bank of Korea (BOK) to take a more active role to aid pandemic-hit small business operators by purchasing their loans receivable owed to banks.

The demand for the BOK's direct purchase of corporate loans, an unprecedented move for a central bank, comes after South Korea became one of the first major economies to raise interest rates last month, ending its 15-month ultra-easy monetary stance

"While adjusting its quantitative easing policy, the Bank of Korea needs to implement inclusive and loosened policies by purchasing loans receivable from the self-employed and small business owners," Democratic Party's floor leader Yoon Ho-jung said in his parliamentary speech to mark the opening of a regular session on Wednesday.

To do so, the BOK may either purchase them directly, or set up a special purpose vehicle (SPV) for the purchase and refinance them with loans carrying lower interest rates, the ruling party spokesman Han Joon-ho told reporters after his speech. 

"He meant we need cut interest rates for the financially vulnerable class when the interest rate cycle turns upward," Han added.

The four-term lawmaker has already proposed revision to the Bank of Korea Act to allow it to buy bonds issued by companies battered by disasters. Under the current law, the central bank is only able to buy sovereign bonds and government-backed debt. 

Last year, the BOK set up an SPV to finance commercial banks' purchase of bonds issued by companies with low credit ratings. Under the program, it lent a combined 16 trillion won ($14 billion) to commercial banks at an annual rate of just 0.25% so that the lenders extend credit to pandemic-hit companies. The loans were divided into 13 trillion won for corporate bonds and 3 trillion won for loans receivable from the self-employed.

Yoon's speech met with harsh criticism from academics, as well as the BOK and the finance ministry. They said the demand was unreasonable and would hurt the central bank's independence.

"He meant the BOK needs to print more more," said Yonsei University's economics professor Sung Tae-yoon. "It should not be the central bank, but the government who needs to spend money to aid small business owners."

In response to the floor leader's speech, the benchmark government bond yield rose to an almost two-month high. The yield on South Korea's three-year treasury bonds added 0.025 percentage points to 1.489%, the highest closing level since July 15 when it touched 1.497%.

Ruling party calls for BOK's active role to aid COVID victims
The ruling party, which holds a majority in parliament, has suggested several bills aimed at getting the Bank of Korea involved in directly supporting small business operators.

Earlier this year, another ruling party member Min Byeong-seok submitted a proposal to have the Bank of Korea take over all deficit bonds sold by the government for the purpose of aiding the self-employed.

Last week, South Korea’s government proposed a record-high spending of 604.4 trillion won for 2022, despite a widening fiscal deficit. This month, the government is paying out its fifth emergency relief funds to low-income households.

Write to Ik-hwan Kim, Eunyi Ko and Ho-gee Lee at lovepan@hankyung.com

Yeonhee Kim edited this article.

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