Korea Central Bank Withdraws Fund from Market

Korea Central Bank decided to withdraw money from the market by reducing the aggregate loan that is a system to lend fund at low rate to commercial banks.

In addition, the government will open Financial Policy Committee at 30th, Ministry of Financial & Economic Planning and Financial Supervisory Committee participating, to decide a method to withdraw fund from market.

Finance & Monetary Committee of Korea central bank opened a meeting at 26th and decided to reduce aggregate loan of 11.6 trillion at present to 9.6 trillion in fourth quarter by 2 trillion won.

By this decision, the limit of loan for commercial banks will be 6 trillion won from 8.6 trillion won. On the other hand, fund for local small and medium business via regional head offices of Korea central bank will increase from 3 trillion won to .6 trillion won.

Park Jae-hwan, senior officer for Policy Planning Dept. of Korea Central Bank, commented, “even the residual fund in market will not reduce immediately, but it is a message that Central bank pays attention to residual fund in market”

Commercial banks should borrow 2.6 trillion won at high interest rate and they need 70-100 billion won as financial cost. So it will cause to increase interest rate on loan.

On the other hand, Ministry of Finance & economic Planning considers increasing risk weight on housing mortgage loan from 50% to 70% for the calculation of BIS. In this case, the size of housing mortgage loan will be decreased.

Additionally the ministry review to extend the subject of low housing mortgage loan that is a part of ‘9-4 Housing Market Stabilization Policy’ ▽to increase reserve for loss account when even rollovers existing loan ▽ apply aggregate amount for housing mortgage loan over 60% of the value ▽ extend to district applied from Seoul metropolitan area to whole of the country.

The reason for the review is that reserve for housing mortgage loan over 60% of the value is indicated not to be sufficient.

Korea Central bank will allocate fund for small and medium business to commercial bank in accordance with their record of the performance. It is a government fund to be lent at lower interest rate by 2.5%.

Sang-Chul Kim Kwang-Hyun Kim sckim007@donga.com kkh@donga.com