BOK to Accept Real Estate, Credit Loans as Collateral for Emergency Liquidity

Starting next year, commercial banks in South Korea will be able to receive emergency liquidity from the Bank of Korea (BOK) by pledging real estate loan receivables and credit loan receivables as collateral. The central bank has expanded the scope of eligible collateral to help banks prepare for liquidity crunches such as large-scale bank runs.

The BOK announced on December 14 that it has passed the "Regulations on Emergency Lending Using Financial Institution Loan Receivables as Collateral."

From January 2, corporate real estate-backed loan receivables (excluding residential mortgage loans) and loan receivables where the borrower has a credit rating of BBB- or higher, or an expected default probability of 1% or less, will be included as new eligible collateral.

The BOK's expansion of eligible collateral is aimed at responding to sudden bank runs like the one that occurred at Silicon Valley Bank (SVB) in the United States in 2023. Following the SVB crisis, the BOK had previously expanded the scope of eligible collateral to include bonds issued by public institutions, bank bonds, local government bonds, and high-grade corporate bonds to strengthen its financial stability function. This latest measure now includes bank loan receivables as eligible collateral for emergency lending.

"This is to prepare for the possibility of increased liquidity risk due to accelerating digital transformation in finance," a BOK official said. "We determined it was necessary to receive and utilize loan receivables in advance, as they account for the largest portion of financial institutions' assets."

In fact, major central banks including the U.S. Federal Reserve and the Bank of Japan already use financial institution loan receivables as eligible collateral, and international organizations such as the Bank for International Settlements (BIS) have assessed that utilizing loan receivables as collateral is essential for responding to severe liquidity risks.

The BOK has also established a system to pre-screen and evaluate the eligibility requirements and collateral value of loan receivables periodically submitted by financial institutions, enabling rapid liquidity provision. This is important because loan receivables require complex procedures including information gathering, eligibility screening, and collateral ratio calculation, which take considerable time and should be substantially completed in advance.

The BOK's Monetary Policy Board will provide emergency lending using loan receivables as collateral through a resolution when it determines that additional liquidity support for commercial banks is needed. Specific details including eligible institutions, lending limits, interest rates, and loan periods will be determined by Monetary Policy Board resolution.

"We expect this measure to contribute to the stability of the financial system," a BOK official said. "By utilizing loan receivables, which account for the largest portion of financial institution assets, as collateral, we also expect this to expand funding options for financial institutions and help prevent market instability."