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FSC tightens grip on banks' foreign funding
Writer : Sender
Nov 20, 2009
Korea's financial regulator yesterday announced a set of measures aimed at tightening control on banks' foreign-currency funding, the weakest link in the country's financial exchange market in last year's crisis.
Banks will have to hold at least 2 percent of their total foreign-currency assets in foreign treasury bonds rated A or above, or other safe-haven investments, the Financial Services Commission said in a statement. The measure takes effect in July 2010.
The minimum ratio of long-term foreign financing to long-term lending at local banks will be raised to 90 percent from the current 80 percent. This rule becomes effective with the start of next year.
Korean branches of international banks, however, will not be obliged to abide by the new rules, it said.
"During the global financial crisis last year, many of local financial institutions relied on the government-supplied foreign liquidity as dollar dried up in the market," Choo Gyeong-ho, an executive of the Financial Services Commission, told reporters yesterday.
"The new rule on a minimum safe-asset requirement seeks to address that problem, making banks better cope with a sudden outflow of capital."
Korean authorities have been studying ways to minimize the local financial exchange market's vulnerability to external shocks such as the recent global market turmoil sparked by the U.S. subprime mortgage meltdown.
Concerns about local banks' ability to service maturing short-term foreign debt prompted a mini-currency crisis in Korea late last year. The Korean currency fluctuated sharply in response, sending shockwaves through the economy.
The won shed more than 25 percent against the dollar last year, becoming the worst performer among major Asian currencies. It closed at 1,157 won per dollar yesterday, up 8.8 percent so far this year.
The regulator also announced steps to curb excessive leveraging and force banks to adopt stricter risk management practices for foreign liquidity conditions.
From early 2010, both local banks and branches of foreign banks are not allowed to trade foreign exchange forwards worth more than 125 percent of the value of exports.
The FTC said the new rules will likely have only a minimal impact on foreign exchange market, although it may help reduce exchange rate volatility.
"The measures are aimed at boosting the soundness of foreign assets at banks, not at influencing foreign exchange rates," it said.
(Source: The Korea Herald)
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