Korea's foreign exchange authorities said Tuesday they will look into banks' currency forward transactions in a bid to curb excessive foreign borrowing amid a sharp appreciation of the local currency.
The Financial Supervisory Service (FSS), the financial watchdog, and the Bank of Korea (BOK) said they will launch a special inspection next month into currency forward positions held by local lenders.
"The inspection is designed to check financial stability. We'll act with necessary policy measures once the outcome is released," Kim Seok-dong, chairman of the Financial Services Commission (FSC), told reporters.
A currency forward is an agreement between two parties to exchange two designated currencies at a specific time in the future. The contracts are used to protect the buyer from fluctuations in currency prices.
Currency forward positions refer to the proportion of forward contracts held by a bank to its total equity capital. In Korea, local lenders can hold up to 200 percent, while it is 40 percent for foreign banks operating here.
The joint inspection came on the heels of heightening instability in the foreign exchange market, with the won's sharp appreciation feared to hit the export-driven economy and spark a sudden capital outflow.
The Korean won has strengthened against the U.S. dollar around 5 percent so far this year, breaching the 1,100 mark for the first time in 13 months. It ended at 1,095.80 won against the greenback on Monday.
Analysts point out that liquidity inflows spurred by monetary easing in the United States and other major economies have boosted the value of the won, as investors worldwide opt for riskier assets.
The government has been keeping tabs on any out-of-ordinary moves in the foreign currency trading by financial institutions or exporting companies, believing that banks have recently increased forward contracts, officials said.
A rise in forward contracts can result in excessive short-term foreign borrowing by banks, which undermines their overall financial soundness, they said.
Depending on the outcome of the inspection, the regulator will likely decide whether it will further tighten the ceiling of currency forward transactions, the FSS said.
Meanwhile, the South Korean government is expected to address the impact of the global monetary easing on emerging markets at the Group 20 financial ministers' summit in Mexico early next month, according to government officials. (Yonhap)
The Financial Supervisory Service (FSS), the financial watchdog, and the Bank of Korea (BOK) said they will launch a special inspection next month into currency forward positions held by local lenders.
"The inspection is designed to check financial stability. We'll act with necessary policy measures once the outcome is released," Kim Seok-dong, chairman of the Financial Services Commission (FSC), told reporters.
A currency forward is an agreement between two parties to exchange two designated currencies at a specific time in the future. The contracts are used to protect the buyer from fluctuations in currency prices.
Currency forward positions refer to the proportion of forward contracts held by a bank to its total equity capital. In Korea, local lenders can hold up to 200 percent, while it is 40 percent for foreign banks operating here.
The joint inspection came on the heels of heightening instability in the foreign exchange market, with the won's sharp appreciation feared to hit the export-driven economy and spark a sudden capital outflow.
The Korean won has strengthened against the U.S. dollar around 5 percent so far this year, breaching the 1,100 mark for the first time in 13 months. It ended at 1,095.80 won against the greenback on Monday.
Analysts point out that liquidity inflows spurred by monetary easing in the United States and other major economies have boosted the value of the won, as investors worldwide opt for riskier assets.
The government has been keeping tabs on any out-of-ordinary moves in the foreign currency trading by financial institutions or exporting companies, believing that banks have recently increased forward contracts, officials said.
A rise in forward contracts can result in excessive short-term foreign borrowing by banks, which undermines their overall financial soundness, they said.
Depending on the outcome of the inspection, the regulator will likely decide whether it will further tighten the ceiling of currency forward transactions, the FSS said.
Meanwhile, the South Korean government is expected to address the impact of the global monetary easing on emerging markets at the Group 20 financial ministers' summit in Mexico early next month, according to government officials. (Yonhap)
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