BOK pays interest on banks' required reserves

(ATTN: ADDS RP auction in last 3 paras)
SEOUL, Dec. 11 (Yonhap) -- The Bank of Korea (BOK) on Thursday paid local banks
about 500 billion won (US$372 million) in interest on their required reserves at
the central bank in an effort to help ease a credit crunch.
"A total of 500.2 billion won in interest was paid to them as part of efforts to
help assuage the credit squeeze," the BOK said in a statement.
Last week, the BOK decided to make a one-off interest payment on the reserves to
local lenders for the first time since December 1986. Currently, the reserve
requirement ratio on money market deposit accounts and demand deposits stood at 7
percent.
The reserve ratio refers to the percentage of customer deposits that banks are
required to set aside in cash. If the central bank cuts the ratio, local
commercial banks will have more room in handing out loans.
The move came as South Korean banks have been increasingly reluctant to extend
loans, particularly to smaller firms, amid the slowing economy and a credit
crunch.
Despite a round of rate cuts by the BOK, market interest rates like yields on
certificate of deposits have not fallen as much as expected, deepening liquidity
strains on the financial system.
Earlier in the day, the BOK cut the benchmark interest rate by a record one
percentage point to an all-time low of 3 percent in an effort to bolster the
slowing economy.
In a separate move, the BOK sold repurchase agreements worth 5 trillion won to
local financial firms through an auction, almost half the 10.4 trillion won they
put up for bidding.
The reduced sale is designed to help alleviate a credit crunch among local
financial and nonfinancial companies, it said.
A repurchase agreement is a deal whereby one party sells the other a security at
a specified price with a commitment to buy the security back at a later date. It
is the central bank's main method of releasing liquidity into the market in a
credit crunch and siphoning off excess liquidity.
sooyeon@yna.co.kr
(END)