Seoul: South Korea Sunday announced long-anticipated curbs on banks' currency trades, saying it aimed to rein in short-term foreign debt and volatile capital flows that posed a risk to the world's ninth-biggest exporter.
The authorities, alarmed by the won's sharp swings during recent market turbulence caused by Eur-ope's debt problems, have been priming investors for weeks for action aimed at stabilising its currency and cooling overseas borrowing.
The well-flagged new restrictions slap limits on banks' and other financial institutions' currency forwards, cross-currency swaps as well as non-deliverable currency forwards.
"These measures are aimed at reducing the volatility in capital flows that poses a systemic risk in the country instead of driving the exchange rate into a specific direction," South Korea's finance ministry, two financial regulators and the central bank said in a joint statement.
Safety tools
"The country needs to prepare ‘a minimum set of safety tools' that fully reflect the special features ... such as the country's high volatility in capital flows," the statement said, adding that the new steps reflected a global trend towards tighter regulation of banks' activity.
The curbs, expected to take force in October, will apply to both domestic and foreign banks, but official data showed foreign bank branches are the ones that will be immediately affected.
The new rules will cap domestic banks' and non-bank financial institutions' currency forwards and derivatives at 50 per cent of their equity capital.
The cap for foreign bank branches was set at 250 per cent of equity to account for their lower capital, which on average is just 1/30 of that held by domestic banks.
