"Banks, don't stockpile dollars"…easing foreign currency liquidity regulations

Government announces foreign exchange soundness measures

Deferring stress test for six months

Allowing corporate foreign-currency loans for 'working capital' as well

Banking sector "Limited ability to reverse won weakness"

The government has significantly relaxed foreign exchange regulations targeting financial companies to stabilize the soaring won–dollar exchange rate by increasing dollar supply domestically. It postponed the 'stress test' that checks foreign currency funding shortfalls for financial companies until next year and raised the forward exchange position limit for domestic units of foreign banks. Experts said it would be difficult to expect immediate dollar inflows, but the move could create pressure on speculative forces attempting to distort the market.

On the 18th, the Ministry of Economy and Finance, the Financial Services Commission, the Bank of Korea, and the Financial Supervisory Service announced the "Measures for Flexible Adjustment of the Foreign Exchange Soundness Regime" based on these points. The government cited the temporary deferral of the stress test as a measure that could have the most immediate effect on the market. A stress test is a system that assesses the foreign currency funding shortfall of banks and other financial companies by assuming crisis scenarios and increasing their severity. If they fail to meet the criteria, they must submit plans to expand liquidity, etc.

The government also deferred the stress test last year, postponing it until June of this year. This time, it is again deferring supervisory measures in the same way until the end of June next year. A government official said, "There will be an incentive for financial companies to put dollars they had been holding into the market for fear of failing the test."

However, the industry expects actual dollar supply to be limited because banks must still comply with their own soundness and liquidity management standards.

The government also proposed significantly raising the forward exchange position limits for Standard Chartered Bank Korea and Citibank Korea's domestic corporations from the existing 75% to 200%. After raising limits for domestic banks and foreign bank branches last year, this time it is loosening limits for domestic corporations of foreign banks. The forward exchange position limit refers to the limit on forward contracts a bank can hold relative to its capital. It was introduced in October 2010 to prevent excessive inflows of foreign currency.

A government official said, "Citibank Korea and others are legally domestic corporations but their business structures are similar to foreign banks, and they can secure dollars through their headquarters, so we judged the risk to be low," adding, "However, to prevent a sharp increase in foreign currency liabilities, we are easing the limit to 200% rather than to the same level as foreign banks (375%)."

Other measures include expanding the scope of foreign-currency loans for exporting companies from facility funds to working capital and allowing foreigners to open integrated accounts so they can invest directly in domestic stocks without a local account.

Experts' assessments were mixed. Seo Jeong-hoon, a research fellow at Hana Bank, said, "Given the constraints on directly intervening on a large scale using foreign exchange reserves, using the practical card of 'regulatory improvement' is a timely measure," adding, "It can impose considerable pressure on speculative forces."

On the other hand, Park Sang-hyun, a research fellow at iM Securities, said, "It will contribute to some extent, but it is difficult to accurately gauge the actual scale of dollars that will flow in, and there are limits to inducing private dollar sales when domestic dollar demand is high."

Reporters Nam Jeong-min / Kim Ik-hwan / Jang Hyun-joo peux@hankyung.com