The Korean Economic Forum
Lender of Last Resort by the Article 80 of the 『Bank of Korea Act』
Inseok Shin (Chung-Ang University)Year 2021Vol. 14No. 2
AbstractIn the wake of a financial turmoil triggered by the Covid19, the monetary policy board of Bank of Korea adopted emergency lending measures in 2020,based on article 80 of the Bank of Korea Act. With the backdrop of the two measures, this study analyzes the lender of last resort conducted by the Bank of Korea in its capacity and procedure. It argues that (1) legislators of the article 80 in 1997 intended to limit the target of emergency liquidity to non-banking financial institutions, though wording of the article was left unclear on whether it could be extended to non-financial corporations; (2) in the post Global financial crisis environment, the possibility of a financial crisis centered in capital markets needs be allowed for, thereby the necessity of designing a new framework for the lender of last resort function accordingly; (3) the Bank of Korea needs be explicitly allowed to provide emergency liquidity to non-financial entities; (4) at the same time, potential loss related with the liquidity provision to non-financial entities should be born by the fiscal authority as such policy measures are observationally equivalent to fiscal policy measures.