Seoul to lower foreign exchange derivatives cap of local banks
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
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