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2023 Feb/02
Analysis of Financial Market Stabilization Facilities and Relevant Policy Implications
Issue Papers 23-04
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- Research Topic Capital Markets
- Page 25
- Summary
- The shortage of funds began to have a marked effect on Korea’s financial market by October 2022. When reduced market liquidity intensifies anxiety over corporate insolvency, the market function of supplying funds falls apart rapidly. Financial market stabilization facilities gain in importance at a time like this, which requires discussions on institutional reform. The key to running financial market stabilization facilities lies in expedited large-scale funding, appropriate control of credit risk and regulatory operational procedures.
In the course of overcoming the 2008 global financial crisis and the 2020 Covid-19 pandemic, major economies have accumulated experience in how to operate financial market stabilization facilities. In preparation for a crisis, the US has made a distinction between monetary policy responses and financial market stabilization facilities. On the other hand, Europe and Japan have underscored that market stability measures are part of their monetary policy aiming at securing monetary policy transmission mechanism and thus, such measures hardly represent the features of financial market stabilization facilities. In this respect, the experience of the US offers more diverse implications for the operation of financial market stabilization facilities.
A comparative analysis of the facilities adopted by the US and Korea reveals the following differences. The US uses the Fed’s monetary power to secure funding for stabilization facilities, and the US fiscal authorities (the Department of the Treasury) take over credit risk arising from the operation of facilities. In addition, the Fed’s policy tools are segmented by market. The intervention in the short-term money market is implemented as the first step and the costs of liquidity support are reflected in pricing by applying additional interest rates. It is also noteworthy that US financial market stabilization facilities hardly intervene in the stock market.
As financial market stabilization facilities serve as a safeguard against a financial emergency, their execution method and process should be thoroughly examined and established as a regulatory scheme before any crisis occurs. This requires serious consideration for funding and the role of the central bank and government.