By Kim Jae-won
Foreign lenders in Korea have agreed not to withdraw money from South Korea in times of crisis, the Financial Supervisory Service (FSS) said Tuesday.
Out of 37 global lenders that have branches in Korea, 36 have submitted a letter of promise to the financial regulator, with the remaining one expected to send one by the end of this month, according to the FSS.
The signed letters contain a written promise to do their best to guarantee the stability of their Korean branches’ liquidity.
The letter also stipulates that the foreign lenders will provide foreign currency when Korea is in a currency crunch and inform the FSS when there is a change in their currency holdings and liquidity management policy.
The financial watchdog said the letters will help stem foreign currency flight in times of crisis, a contingency that has taken place in the past.
South Korea has suffered aggravated liquidity crises as branches of international banks withdrew their currency assets during the 1997-98 Asian currency crisis. A similar situation of a lesser degree took place during the more recent global financial crisis.
“We expect foreign lenders not to take out foreign currency like they did before,” Do Bo-eun, the head of foreign exchange department of the FSS, said.
However, some experts pointed out the written promise doesn’t have any tooth in it as no penalty is stipulated for violators.
“If a liquidity crisis occurs in their in home offices, they may be forced to take out foreign currency from Korea because it is a matter of survival,” a senior analyst from a local private economic research center said on condition of anonymity due to the sensitivity of the issue. I do not think the measure work well in case of crisis,” the researcher said.
The FSS admitted to a lack of effectiveness but said it is not easy to impose fines for violations of the agreement because there is no precedent to levy fines or put sanctions for transactions between headquarters and branches of international banks.