Seoul to lower for­eign ex­change de­riv­a­tives cap of lo­cal banks

The Pak Banker - - Front Page -

SEOUL: The govern­ment will tighten the for­eign ex­change (FX) de­riv­a­tive po­si­tions of both for­eign and do­mes­tic banks by 20 per­cent early next year, a re­port said on Sun­day.

The Yon­hap News Agency quoted un­named sources at the Min­istry of Strat­egy and Fi­nance and the Bank of Korea who said that the max­i­mum FX de­riv­a­tives limit on the branches of for­eign banks will be low­ered to 200 per­cent from 250 per­cent set in June. For do­mes­tic banks, the ceil­ing will be set at 40 per­cent of their cap­i­tal, down from cur­rent 50 per­cent.

The plan shows that the govern­ment is still wor­ried about large in­flows of spec­u­la­tive cap­i­tal from Western coun­tries, de­spite the re­cent in­tro­duc­tion of a bank levy and the re­in­state­ment of bond taxes on for­eign­ers. Es­pe­cially, the in­clu­sion of do­mes­tic banks in the al­leged re­vi­sion of the FX rule in­di­cates that the govern­ment is com­mit­ted to push its poli­cies of curb­ing banks' ex­ces­sive bor­row­ing from abroad by show­ing that they are not dis­crim­i­nat­ing for­eign banks in fa­vor of Korean ones.

The Min­istry of Strat­egy and Fi­nance said in an of­fi­cial press re­lease Sun­day that it is not yet de­cided. The FX de­riv­a­tive limit _ 250 per­cent of cap­i­tal for branches of the 37 for­eign banks here and 50 per­cent for do­mes­tic banks _ was first an­nounced in June, and has been grad­u­ally com­ing into ef­fect. The re­vi­sion will dam­age some of the banks' FX busi­ness.

Ba­si­cally, for­eign ex­change de­riv­a­tives are con­tracts that make bets on the fu­ture price of cur­ren­cies. Banks use them ei­ther to make trad­ing profit, or to bor­row money at fixed prices from abroad for their whole­sale busi­ness. Some of the for­eign cur­rency deals are made at the request of ex­porters, such as ship­builders and car­mak­ers, who want to hedge their for­eign ex­change ex­po­sure.

For­eign banks usu­ally have higher ex­po­sure to for­eign ex­change de­riv­a­tives be­cause they act as a whole­saler of for­eign cur­rency in Korea. Rec­og­niz­ing this role, the govern­ment has al­lowed them to have a higher level of po­si­tions than lo­cal banks.

A volatile for­eign ex­change rate has been thought as the most vul­ner­a­ble part of the ex­port-ori­ented econ­omy of South Korea. The govern­ment hopes reg­u­la­tions can re­duce this volatil­ity by dis­cour­ag­ing banks from bor­row­ing too many dol­lars dur­ing boom times and pay­ing back the debts com­pletely dur­ing bad times. Pol­i­cy­mak­ers and reg­u­la­tors have iden­ti­fied that the ex­ces­sive FX po­si­tions at for­eign bank branches are the main cul­prit be­hind the for­eign ex­change crises that de­stroyed the econ­omy in 1997 and 2008. Ac­cord­ing to Shin Hyun­song, a Prince­ton pro­fes­sor who has been ad­vis­ing Pres­i­dent Lee Myung-bak, the to­tal FX li­a­bil­i­ties at the for­eign bank branches was never higher than $30 bil­lion un­til the first half of 2006. -PB News

MUL­TAN: Prime Min­is­ter Syed Yousaf Raza Gi­lani of­fer­ing Fateha for the soul of Syed Haider Raza for­mer UC Nazim and Mem­ber Board of Gover­nor, at Sher Shah. -On­line

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