Bank of Korea

The Bank of Korea (BOK; Korean: 한국은행; Hanja: 韓國銀行; RR: Hanguk Eunhaeng) is the central bank of the Republic of Korea and issuer of Korean Republic won. It was established on 12 June 1950 in Seoul, South Korea.

The bank’s primary purpose is price stability. For that, the bank targets inflation. The 2016–18 target is consumer price inflation of 2.0%.

History

1945-1970

The Bank of Korea was established on June 12, 1950 under the Bank of Korea Act. Following liberation on August 15, 1945, the Korean economy was plunged into turmoil. Tackling the severe inflation and financial disorder brought about by an acute shortage of resources and the division of the country along the 38th parallel was the immediate priority. In this situation, discussions raged across the country on establishing a central bank for the Republic of Korea and Dr. A.I. Bloomfield, dispatched from the Federal Reserve Bank of New York, drafted the Bank of Korea Act. Based on this draft, the Bank of Korea Act was passed in May 1950 and the bank launched its operations as a central bank on June 12, 1950. It was given a wide range of functions in relation to monetary and financial policy, bank supervision, and foreign exchange policy.

The Korean War began only thirteen days after the bank was created, forcing the Head Office to relocate to Daejon, Daegu and Busan. It returned to Seoul after the Incheon landings. The bank’s 89 boxes of silver and gold bullion was moved by the military to the Jinhae naval station and then given to the New York Federal Reserve Bank to pay for South Korea’s entry into the IMF and International Bank of Reconstruction and Development in 1955. The first Bank of Korea notes circulated after June, 1950 alongside older Bank of Choson notes, which were flooded into the market by North Korean forces. To stop a liquidity crisis during the war, the bank instituted a limit on withdrawals of ₩10,000 per week and ₩30,000 per month for households. It also tried to fight inflation with a Maximum Loan Ceiling System in January, 1951 which set quarterly caps on the increase in general loans and required prior approval for special or general purpose loans exceeding 50 million won. The bank repaid $470 million in aid from the UN Korean Reconstruction Agency and Economic Cooperation Administration beginning in 1952.

After the Korean War, inflation remained high with a 48 percent annual increase in wholesale prices in Seoul from 1954 to 1956. The Korean Development Bank (KDB) was created on April 1, 1954 to rebuild the country, but faced opposition from the Bank of Korea which saw it as a threat to centralization under the control of the Minister of Finance. The Bank of Korea underwrote and absorbed five billion hwan of Industrial Rehabilitation Bonds to finance the KDB. Continuing its bid to rein in inflation, the Bank of Korea set credit ceilings, a loan priority system and loan prior approvals. Interest rate policies and reserve requirements of 15 to 30 percent were widely used. In January, 1954, the bank dropped reserve requirements to 15 percent to make funds more available, but then raised it back to 25 percent and ultimately dropped to as low as 10 percent by April, 1957.

The Korea-US Joint Economic Committee put in place the Fiscal and Monetary Stabilization Plan in 1957. It restricted defense spending and loans and in 1958 instituted education taxes. South Korea had bumper rice harvests and grain prices dropped with surplus agricultural products from the US. The General Banking Act created in 1950 only came into effect in the late 1950s. It focused on privatizing the banking sector and creating regional banks, such as Seoul Bank or Hungop Bank, and encouraged banks to close down branches that were losing money.

When the Democratic Party took power in 1960 after the April 19 Revolution, they pursued fiscal austerity and ended up with significant financial surpluses. The preferential financing system was eliminated and the bank abolished its rediscount ceiling, although quarterly credit ceilings were reimposed. The new government centralized foreign exchange rates and steeply depreciated the hwan relative to the dollar from 500-600 hwan to the dollar to 1,300 from January to February, 1960. Citizens were required to sell their foreign currency through the Bank of Korea.

Following a year of economic stagnation, the May 16 coup led to massive bank runs. The government revised the budget three times in 1961 pursuing an expansionary approach. Money demand dropped by the third quarter and as a result commercial banks had large reserves. On November 1, the government added Monetary Stabilization Bonds with no holding limits on risk-weighted assets and credit ceilings. The bank drew up the first Five-Year Economic Development Plan in 1961. The government took a much more hands on approach to monetary policy, stripping the Bank of Korea’s Monetary Policy Committee of many of its previous powers. The government took over control of commercial banks. Meanwhile, the Korea Stock Exchange became a joint stock corporation and witnessed significant speculation which was resolved when the bank financed 38 billion hwan to fund a delivery settlement. In 1962, the hwan was replaced with the won at one-tenth its value. Through 1963, a poor harvest, declining US aid and depletion of foreign currency reserves to pay for imports steeply devalued the won.

Concerned about balance of payments and a high rate of imports, the government instituted a floating exchange rate in 1965 that depreciated the won, increasing exports 37 percent while decreasing imports. Interest rates were rationalized and increased from 20 percent to 36.5 percent. Into 1966, the bank abolished credit ceilings but raised reserve requirements. 1967 marked the reestablishment of regional private banks such as Busan Bank and Daegu Bank.

In November, 1969, the government tried to “cool off” the economy which had grown at over 10 percent annually, but had soaring prices and current account deficits, by imposing lending and rediscount ceilings.