South Korea said that it will tighten regulations on currency transactions in the local foreign exchange market in a bid to ease financial volatility and prevent abrupt capital outflows from causing a chaos to the economy.
The Seoul government yesterday said it will also step up efforts to improve the soundness of foreign currency liquidity held by banks by restricting their use and calling for stricter debt control, according to the Ministry of Strategy and Finance in a joint press release with the central bank and other financial regulators.
"Korea has experienced high volatility of capital flows in its two previous financial crises where extreme amount of capital flowed in when the economy boomed, but money flowed out fast when it went sour.
"This caused financial and foreign exchange markets to suffer fluctuations more seriously than the real economy faced, which in turn negatively affected the real economy," the ministry said in the release.
"We need to ease the volatility of capital flows as a key measure aimed at preventing the repeat of such economic turbulences," it noted.
Under the latest measures, the ministry said that it will restrict the amount of currency forwards and other currency-related derivatives held by Korean banks to 50 per cent of their equity capital, while the ceiling for local branches of foreign banks will be set at 250 per cent, the ministry said.
The transaction ceiling for exporters will also be lowered to 100 per cent of their transaction of real assets from the existing 125 per cent, according to the ministry.
A currency forward is a contract that locks in the price at which an entity can buy or sell a currency at a future date.
