The Bank of Korea has revealed that it purchased over 72 trillion won in repurchase agreements (RPs) this year. This is the largest amount since the current base interest rate system was established in 2008. It appears that more than 34 trillion won in RPs were purchased in the fourth quarter to inject money into the market amid the aftermath of martial law and the U.S. presidential election, which destabilized the short-term money market.
◇ bank of Korea purchases 72.6 trillion won in RPs this year… largest since 2008
According to data submitted by the Bank of Korea to Oh Ki-hyeong, a member of the Democratic Party of Korea, on the 11th, the bank purchased RPs worth 72.56 trillion won this year. This surpasses last year's RP purchase amount of 50.88 trillion won, which was the highest since 2008. It is over 30 trillion won more than in 2020 (42.33 trillion won), during the spread of COVID-19.
More than half of the purchases were concentrated in the fourth quarter when the U.S. presidential election and martial law situation arose. The quarterly RP purchase amounts are ▲18.5 trillion won in the first quarter ▲13.5 trillion won in the second quarter ▲6.5 trillion won in the third quarter ▲34 trillion and 600 billion won in the fourth quarter. When breaking down the fourth quarter (October to December) monthly, it was 1.5 trillion won in October, 18.5 trillion won in November, and 14 trillion and 600 billion won in December. All December RP purchases were made after the declaration of martial law on the 4th.
An RP is a bond issued by a financial institution with the condition to repurchase it at a fixed interest rate after a certain period. Financial institutions secure funds using the bonds they hold as collateral, while investors can obtain stable revenue. Typically, high-liquidity assets such as government bonds and public bonds are used as collateral, with maturity ranging from one day to several weeks.
The Bank of Korea has purchased RPs to supply liquidity to the short-term money market. When financial market instability expands or there is an urgent demand for funds, the bank injects money into the market through RP purchases, and if there is excess liquidity, it sells RPs to absorb funds. A representative case is unlimited RP purchases over three months in March 2020 during the COVID-19 period to supply funds to the market.
◇ bank of Korea states measures for market supply… average balance is less than during crisis
The Bank of Korea explained that the increase in RP purchases this year reflects the management of liquidity levels within the short-term money market at an appropriate level. A Bank of Korea official explained, “RP purchases are conducted when market liquidity is insufficient, or when banks lock up liquidity at the end of a quarter or year, or when market instability may spread risk to the bond market or long-term financial market.”
The official noted, “Among the cases where the Bank of Korea purchased RPs this year, except for the purchases of 10.81 trillion won and 3.25 trillion won on Dec. 4 and 6 respectively, it was done for market supply conditions,” adding, “All RPs purchased before have been fully redeemed, leaving a current balance of only 14 trillion and 600 billion won.”
Also, when considering the ‘average balance,’ which is the average of the remaining RP purchase balance aggregated daily, it is noted to be at a reduced level compared to past crises. According to the Bank of Korea, the average annual balance reflecting up to Dec. 6 this year was calculated to be 1.87 trillion won. Although it increased to double last year (8.5 trillion won), it is less compared to 2008 (2.37 trillion won) during the financial crisis or 2020 (5.03 trillion won) during the COVID-19 spread.
However, there is a need to be wary as RP purchase amounts could significantly increase in the future. This is because the Bank of Korea has predicted an expansion in RP purchases following the martial law situation on the 4th. On the 4th, the Bank of Korea included industrial finance bonds, small and medium enterprises (SME) finance bonds, export-import finance bonds, special bonds from nine public institutions, agricultural finance bonds, and fisheries finance bonds as new RP purchase targets and expanded the RP trading entities to cover all domestic banks, foreign bank branches, securities firms, and futures companies.
Yoon Yeo-sam, a researcher at Meritz Securities, said, “RP trades intervene to prevent urgent situations due to lack of liquidity,” adding, “While excessive purchases may increase short-term money market liquidity causing unnecessary money circulation, given the current numerous uncertainties, it does not seem like any major problems would arise from increasing short-term liquidity.”