(Adds details in first item, mentions possible leverage ratio )
Nov 19 (Reuters) - South Korea's financial watchdog announced several measures on Thursday requiring banks to enhance the soundness of their foreign currency assets so that they can better withstand capital flight.
The following are the details of the forex liquidity control measures released by the Financial Services Commission:
MINIMUM REQUIREMENT OF SAFER FOREIGN ASSET
- Banks are required to hold at least 2 percent of their total foreign assets in foreign treasury bonds rated A or above or set aside a certain amount of safe foreign assets, such as treasuries, in proportion to the value of liabilities maturing within a year.
The initial ratio of 2 percent could be raised later on.
State-owned Korea Development Bank and Export-Import Bank of Korea will be exempted from the measure.
- Purpose: to help banks cope better with a sudden flight of capital. Many financial companies resorted to state support to resolve their foreign liquidity shortages during the global financial crisis. Most major banks already meet this requirement.
- Takes effect: July 2010
FOREX DERIVATIVES TRANSACTION RISK MANAGEMENT
- Both local banks and branches of foreign banks are not allowed to trade forex forwards worth more than 125 percent of the value of exports to avoid excessive currency-hedging.
- Takes effect: early 2010
FOREIGN LIQUIDITY RATIO
- Banks should classify foreign assets depending on how fast banks are able to cash them in, in order to come up with a more realistic liquidity ratio. Under existing rules, all foreign-currency assets are assumed to be retrievable at any time, including forex lending for working capital and foreign currency securities, such as corporate bonds.
- Purpose: to ease imbalances between bank assets and liabilities, which intensified a foreign currency squeeze last year and the won's fall against the U.S. dollar.
- Takes effect: July 2010
LONG-TERM FOREX FUNDING-LENDING RATIO
- Banks should raise the ratio of their long-term forex funding to long-term forex lending to 90 percent from the current 80 percent. The financial watchdog will encourage banks to enhance the ratio to more than 100 percent by the end of the first half in 2010.
- Takes effect: early 2010
FOREIGN LIQUIDITY RISK MANAGEMENT
- Banks should introduce new liquidity risk management systems for foreign currency assets, under which they will be required to draw up contingency financing plans and to estimate the amount of possible capital flight in the case of a crisis and create yardsticks for early warnings.
- Purpose: a systemic internal controlling system is needed because a foreign liquidity crisis can easily escalate into a full threat to the entire financial system.
- Takes effect: early 2010
LEVERAGE RATIO OF FOREIGN ASSETS
- Basel Committee on Banking Supervision is looking at possible restrictions on financial companies' leverages. The scope, timeline and other details on the prospective measure will be subject to international moves.
(Reporting by Seo Eun-kyung and Kim Yeon-hee in SEOUL; Editing by Neil Fullick)