Banks told to stem short-term debt
By Kim Tong-hyung
The government has urged banks to take a harder look at speculative money flow as it moves to stem the increase in the country’s short-term debt.
The Strategy and Finance Ministry Tuesday called in a number of executives from local banks, including the ``big-four’’ commercial lenders of KB Kookmin, Woori, Shinhan and Hana, to discuss the banks’ handling of foreign exchange derivatives and assess the risk over speculative inflows of foreign currency.
Executives of the state-run policy banks Export-Import Bank of Korea (Korea Eximbank) and Korea Development Bank (KDB) and foreign banks HSBC, JPMorgan Chase and Tokyo-Mitsubishi UFJ were also present at the meeting, according to officials from the ministry’s international finance division.
``Short-term debt taken on by banks has been increasing and we have been watching this carefully. Banks will have to be more cautious in this area of their business,’’ said a ministry official.
``The meeting was arranged to express the government’s concerns over the increasing short-term borrowing of local banks and update them on the taxes on non-core foreign currency debt that will be imposed starting in August.’’
For policymakers, short-term debt issued in foreign currency is the least-healthy type of ``hot’’ money as the borrower could be left destabilized after that cash flows out.
The renewed commitment for capital control comes at a time when the value of the local currency has been surging to a stronger level than recent years and threatens to dent the country’s vibrant exports. Officials believe that hot money has been putting more pressure on the won to appreciate.
The government recently established a set of measures to restrict the volume of trading in foreign-exchange derivatives to curb the volatile flow of capital.
The ceiling of currency forwards that could be held by branches of foreign banks was lowered to 200 percent of their equity capital from 250. The limit for Korean banks was reduced from 50 to 40 percent.
In May, the Bank of Korea (BOK) and the Financial Supervisory Service (FSS) collaborated on an inspection of local banks to determine whether they have been complying with the country’s regulations on buying and selling non-deliverable forwards (NDFs).
An NDF is a foreign currency financial derivative instrument that differs from a normal forward contract in that there is no settlement of the two currencies at maturity. Instead, it’s based on the movement of two currencies, with a net cash settlement made between the counterparties.
NDFs are commonly used to hedge local currency risks in developing economies where capital markets are small and restrictions on capital movements are stronger.
Korea’s short-term debt issued in foreign currency stood at $146.7 billion as of the end of March, up $11.7 billion from three months earlier, marking the sharpest quarterly increase since the third quarter of 2008, according to the BOK.