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Prepared by Harald Hirschhofer with assistance from Eduardo Borensztein and Marianne Schulze-Ghattas.
The financial sector reform program is discussed in chapter III.
The Governor of the BOK is appointed by the President upon recommendation by the Minister of Finance and Economy. The central bank act is currently under revision and a change in the composition of the Monetary Board is being considered.
In addition, the financial sector includes a number of other financial institutions such as securities companies, leasing companies, and non-life insurance companies.
In addition, technical improvements in the trading and settlement infrastructure—such as the introduction of a blind brokerage system for the call market, and, most recently, of the BOK wire system, which includes a large value gross settlement system for call money transactions—have enhanced the transparency and efficiency of trading and reduced transaction risks.
Government and public bonds include national government bonds, state government bonds, state enterprise bonds and MSBs issued by the BOK. Although MSBs typically have maturities of one year or less and are considered money market instruments, they are generally included in bond market statistics. For a detailed description of the Korean bond market see World Bank (1995).
Certain national housing bonds have a maturity of 20 years, the longest maturity of all government bonds.
Another less commonly referred to aggregate is M2B. M2B consists of M2A plus certificates of deposit and repurchase agreements of deposit money banks, as well as short-term liabilities of NBFIs.
During 1970-77, domestic credit was in fact used as an intermediate target of monetary policy. In 1978 it was replaced by M1 and in 1979 by M2.
These placements of MSBs differed from conventional open market operations in that they were done on a mandatory basis and not at market interest rates.
The evolution of the operating procedures of monetary policy in Korea is described in Bank of Korea (1993).
The Monetary Board determines the maximum amount of MSBs that can be issued by the BOK. The amount of MSBs outstanding peaked at 31 percent of M2 in 1988 and declined to 19 percent of M2 at the end of 1994.
Short-term RPs are sold/bought directly at prices fixed by the BOK.
In a Dutch auction, bidders either congregate in one room or interact electronically. The auctioneer begins with calling an unreasonably high price (or low yield) and then progressively lowers the price until the entire stock is sold or a reservation price is reached (see Bartolini and Cottarelli (1994)).
These mandatory allocations involved MSBs with shorter maturities which are not yet being auctioned.
In 1994 the refinancing of policy loans accounted for almost 80 percent of total outstanding loans and discounts of the BOK.
The ceiling applies to rediscounts of commercial and trade bills. Refinancing of policy loans to the agricultural, forestry and fisheries sectors remains outside the ceiling.
The same reserve requirements are imposed on KDB and KLCB deposits.
Deposits with preferential reserve ratios include workman’s savings for housing (3 percent), housing installment deposits (3 percent), mutual installment deposits (3 percent), workman’s property formation (3 percent), as well as time and installment savings deposits with maturities exceeding 2 years and household preferential installment savings deposits (all 8 percent). Foreign currency deposits held by non-residents are subject to a required reserve ratio of 1 percent.