southkorea-central

Bank of Korea

The Bank of Korea was established 12 June 1950 under the Bank of Korea Act.

The Bank of Korea was originally established with a capital of 1.5 billion won, all of which was subscribed by the Government, but the amendment of the Bank of Korea Act in 1962 made the Bank a special juridical person having no capital.

The primary purpose of the Bank, as prescribed by the Act, is the pursuit of price stability. The Bank sets a price stability target in consultation with the Government and draws up and publishes an operational plan including it for monetary policy.

Its Functions:
- Issuing Banknotes and coins:
The Bank of Korea has the exclusive right to issue banknotes and coins in any dimension, design or denomination determined by the Monetary Policy Committee. The banknotes and coins thus issued have the status of legal tender within the country for all transactions, both public and private, without limitation.

The Bank is not required to maintain any prescribed minimum ratio of gold or foreign exchange against its banknotes and coins issue, nor is any maximum limit imposed on the issue. The issue of banknotes and coins relies ultimately on decisions made by the Bank of Korea in line with its monetary policy.

Formulating and Implementing Monetary and Credit Policy:
The Bank of Korea conducts monetary policy with an emphasis on price stability, but with economic growth, financial and asset market conditions are also being taken into consideration.

The Bank introduced an inflation targeting regime after the 1997 foreign currency crisis, and changed the monetary aggregate-oriented operational framework to an interest rate-oriented framework in which the call rate (uncollateralized overnight rate) formed its policy rate and operational target.

The Bank reformed its monetary policy framework recently and the new framework was introduced in March 2008. The measures of the reform include the change of policy rate from the call rate to the Bank of Korea Base Rate, improvements in reserve requirement scheme, regularization of open market operations, and introduction of standing facilities.

The Bank of Korea employs loan policy to control the availability of banking institutions' funds in order to affect liquidity conditions in the markets.

The Bank's loan facilities consist of Aggregate Credit Ceiling Loans, Liquidity Adjustment Loans and Deposits, Intraday Overdrafts and Special Loans.

The Aggregate Credit Ceiling Loans System was introduced in 1994, replacing the former policy financing arrangements. Until February 1994, the Bank of Korea extended loans almost automatically within an amount corresponding to a definite ratio to banks that provided loans to small and medium enterprises and the export sector. As a result, the Bank's control of liquidity was somewhat constrained. But under the new system, the Monetary Policy Committee sets the aggregate credit ceiling for the Bank's extension of loans to the whole banking sector every three months. Individual loan quotas are then allocated to each bank according to such criteria as performance in the extension of Trade Financing, Corporate Procurement Loans and Electronically-processed Secured Receivables Loans, etc. The credit quotas on individual banks are fine-tuned by the Bank every month.

The Bank of Korea carries out open market operations as and when necessary to affect the level of reserves in the banking system and to manage the overnight call rate so that it does not deviate too widely from "the Bank of Korea Base Rate (or Base Rate)" determined by the Monetary Policy Committee. These operations are conducted in two ways : securities transactions and the issuance of Monetary Stabilization Bonds(MSBs).

Securities transactions involve purchases and sales in the secondary market of government securities, securities guaranteed by the government, other securities of types specified by the Monetary Policy Committee, and Monetary Stabilization Bonds(MSBs). These transactions are suitable for day-to-day use because they are flexible as to timing and magnitude.

Bankers' Bank:
The Bank of Korea makes loans to and receives deposits from banks, thus serving as the banker to the banking sector.

It maintains checking accounts for banking institutions. Reserve deposits kept in these checking accounts are used to clear checks and settle interbank balances, including those arising from the use of BOK-Wire, the Bank's real-time gross-settlement system.

The Bank conducts credit operations with banks by rediscounting commercial bills or by extending loans against eligible collateral with maturities of up to one year.

As the lender of last resort, the Bank may, in periods of serious emergency when monetary and banking stability is directly threatened, extend exceptional loans to banking institutions.

Government Bank:
As the fiscal agent of the Government of the Republic of Korea, the Bank of Korea carries out various kinds of business for the Government in accordance with the Bank of Korea Act and other relevant laws.

1) Issuance and redemption of government bonds by the Bank of Korea acting for the government.

2) Based on the end of the year.

3) Includes issuance according to primary dealer`s option exercise since Sep.2006.

4) Since Nov. 12, 2003, their issue has been integrated with that of Treasury bonds with only the redemption business being left.

The Bank handles the receipt of national revenues and the disbursement of national expenditures as the depositary of the Government. The Government maintains a current deposit account with the Bank to which taxes and all other government revenues are concentrated. The Government's disbursement offices pay treasury funds to creditors by the Treasury Funds Real Time Transfer System, introduced in 2003 and operated by means of file-transfer through the network connecting the Ministry of Strategy and Finance(including the disbursement offices), the Bank of Korea, and financial institutions.

For the convenience of tax-payers, the Bank has designated almost all branches of banks nationwide as its Treasury collecting agencies to handle Treasury services.

The Bank may extend loans to the Government as an account overdraft or in other forms, and it may directly subscribe to government bond issues. The maximum total amounts of such loans and direct subscriptions to bonds are authorized by the National Assembly. Their terms and conditions, though, are determined by the Monetary Policy Committee.

The Bank may also grant loans to government agencies which carry out projects or functions of a public character in the fields of production, purchase, sale or distribution on behalf of the Government. At present, such loans are extended to the National Agricultural Cooperative Federation as the government agency for the handling of fertilizer.

The Bank of Korea handles business relating to the issue, sale or redemption of securities representing government obligations in such manner as may be determined by the Government. In addition, the Bank accepts custody of securities belonging to the Government.

Financial System Stability:
Financial system stability is one of the core functions of the Bank of Korea.

The Bank of Korea monitors and analyzes the soundness of the Korean financial system on an ongoing basis to maintain its stability, and also provides liquidity to the financial markets as necessary.

Financial stability has a mutually reinforcing relationship with price stability, the goal of the Bank of Korea's establishment. First, financial stability has a positive influence on price stability, because the effects of monetary policy are transmitted to the real economy through the financial system. Price stability has a positive influence on financial stability at the same time, as low and stable inflation ensures the efficient allocation of resources and is very likely to be accompanied by stable asset prices.

An important precondition for financial stability is that all three pillars of the financial system, its financial institutions, financial markets, and financial infrastructure, be sound and stable. The Bank of Korea therefore monitors these areas on an ongoing basis to identify key vulnerabilities, and provides emergency liquidity when necessary to maintain financial stability against disruptions in the financial system. For financial institutions receiving emergency liquidity support, the Bank examines and verifies their business operations and financial statuses. In addition, the Bank may request the Financial Supervisory Service (FSS) examination of these banks on its behalf, or joint examination of them with the FSS.

The Bank is further responsible for ensuring that the payment system, one key part of the financial system infrastructure, remains safe and robust. It also cooperates actively with the government and the FSS to maintain the prudential regulations and market disciplinary mechanisms that contribute to financial system stability.

Managing Foreign Exchange Reserves:
The Bank holds and manages Korea's official foreign exchange reserves. Its principal objectives in their management are to safeguard the value of the reserves and to meet the nation's demand for foreign exchange. The size of the reserves is tending to increase as the scale of trade and the economy grows larger.

The Bank conducts certain foreign currency operations. Their main aim is generally to counter disorderly market conditions. The exchange rate of the Korean won against the U.S. dollar is determined by market forces, namely foreign exchange demand and supply in the domestic market. Exceptionally, however, if there is a large discrepancy between demand and supply that disrupts the regular operation of the foreign exchange market, the Bank participates in it as a buyer or seller.

In addition, the Bank acts as agent for the Government in managing the Foreign Exchange Equalization Fund, which was founded in 1967 with the object of stabilizing the foreign exchange market.

The Bank represents the government in all dealings and transactions with international financial institutions of which the Republic of Korea is a member.