South Korea to ease banks' forex forward rule starting July

[SEOUL] South Korea said on Thursday it will ease one of key capital controls implemented after the 2008-2009 global financial crisis as concerns grow over possible capital outflows in the face of higher interest rates in the US.

The cap on the foreign currency forward positions that local banks can hold will be raised to 40 per cent from the current 30 per cent starting July, a joint statement from the finance ministry and regulatory agencies said on Thursday.

For foreign banks, the same ceiling will be raised to 200 per cent from the current 150 per cent.

This will be the first easing in the rule since it was first implemented in 2010. The last time the capital control rule was tightened was in January 2013. "We've seen a weakening in capital inflows since the second half of last year due to monetary policy tightening in the US," the statement said.

"Going forward, we see the possibility of capital outflows increasing on political and economic risks like the Brexit referendum, the US presidential election and rate hikes there."

The statement said the current system faced limits should another global crisis emerge and banks run into low liquidity. The announcement came just hours after the US Federal Reserve kept interest rates unchanged and signalled it still planned to raise rates twice in 2016.

The risk of banks' short-term foreign exchange debt or forwards trading surging on the policy change was low, the authorities said, as the currency derivative holdings for local banks stood at 5.8 per cent of their capital and 58.6 per cent for foreign banks at end-April.

The statement also confirmed a Reuters report that South Korea will require local banks to hold 60 per cent of their foreign currency exposure in liquid assets starting next year, when banks will be required to observe the foreign currency liquidity coverage ratio (LCR), a Basel III regulation aimed at promoting resilience against liquidity risk.

The ratio requires banks to hold high-quality assets that can readily be converted into cash within 30 days.

The LCR will not be applied to foreign banks operating in South Korea or to banks with foreign exchange debt of less than 5 per cent of their total debt, and that debt is less than US$500 million.

The LCR will be hiked by 10 percentage points each year until it reaches 80 percent in 2019.

A smaller ratio will be applied to some state-run banks like the Industrial Bank of Korea next year as an exception, the statement said.

The joint statement was issued by Ministry of Finance, the Bank of Korea, the Financial Services Commission and the Financial Supervisory Service.

REUTERS