South Korea’s central bank may resort to the exceptional case of lending out to financial institutions beyond commercial banks for the first time since the 1997-1998 international bailout crisis as its moderated version of quantitative easing falls short of reining in the surge in borrowing rates in commercial papers.

“If the (short-term liquidity) situation worsens, we could review lending money to non-bank financial institutions to stabilize the corporate bond market under the Bank of Korea Act Article 80,” said BOK Governor Lee Ju-yeol on Thursday. “The bank cannot rule out the credit crunch risks in the local financial markets given the uncertainties in the global financial markets,” he said.

The BOK law prohibits money deals beyond banks. But the Article 80 allows exception in case of “serious capital problems” in financial companies. The move requires approval from four members from the monetary board.

The exception was made only once. The central bank lent out to Korea Securities Finance Corp. to back guarantees for merchant banks in collective risk from a bank run during the Asian financial crisis in 1997.

Earlier on the same day, the BOK accepted 5.25 trillion Korean won ($4.2 billion) in bids from financial institutions for 91-day repurchase agreements (repos) at a rate of at 0.78 percent, 3 basis points over the policy rate of 0.75 percent, as part of its pledge to run “unlimited” quantitative easing program temporarily for three months to calm money market battered by the coronavirus pandemic. The emergency funds were snatched up by mostly securities companies scrambling to cover losses in equity-linked securities.

The liquidity fueling fails to calm the borrowing rates in the debt market.

The yield of 91-day commercial paper finished Thursday up 1 basis point at 2.23 percent, the highest since February 2015. Some in the market are demanding the central bank to act more aggressively by including purchases of corporate debt.

By Lim Sung-hyun, Kim Je-lim, Lee Sae-ha, and Cho Jeehyun

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