Central bank may examine bank bond purchase to help lenders: source

SEOUL, Oct. 21 (Yonhap) -- The Bank of Korea (BOK) is mulling over purchasing bank bonds to help local lenders suffering from liquidity shortfalls, an official source said Tuesday.

The source, who declined to be identified, said no decision on the sensitive
subject has been made, but policymakers at the central bank are contemplating it
as a back-up contingency plan.
"There has been debate on including bank bonds in the BOK's open market
operations that are carried out as a money supply control policy," he said. At
present, only Treasuries, state-guaranteed shares and currency stabilization
bonds can be bought and sold by the central bank, and any changes must be
approved by the Monetary Policy Committee (MPC).
The insider said that the MPC, which convenes Thursday, will probably not touch
the issue.
The buying of bank bonds through a repurchase agreement deal can generate market
demand and make it easier for lenders to get cash needed to cover their own
outstanding debts or to provide fresh loans. An inflow of cash could also help
stem the rise in interest rates and facilitate rollovers for debt.
A steady rise in interest rates this year is putting a burden on households and
businesses that can adversely affect economic growth.
Despite such benefits, others in the BOK caution that buying bank bonds poses
considerable risks for the central bank and should only be considered in
emergencies.
They pointed out that offering such assistance can trigger criticism that the
state is covering for banks' bad management practices.