By Cho Jin-seo
Staff reporter
The government announced a set of tight measures on foreign exchange control Sunday, in a bid to ease heavy volatility on the local financial market.
The introduction of the new regulations will effectively give Korean banks some $18 billion of foreign banks’ business. The government also expects that tightened regulations on currency forward transactions will help stabilize the local currency market by curbing sudden cross-border capital flows and discouraging firms from making speculative bets on exchange rates.
The targets are 37 foreign banks operating here, that have been blamed by policymakers and academics for speculating on foreign exchange rates and causing wide fluctuations in the won-dollar rate.
“Under the new guidelines, there is approximately $18.7 billion of forward contracts to be reduced at domestic and foreign banks. Among them, $18.2 billion are at foreign banks,” Yim Jong-yong, vice minister of strategy finance, said in a press conference Sunday at the government complex in Gwacheon, south of Seoul.
The rules, which will go into effect in July, will restrict foreign banks from having foreign exchange derivative positions larger than 250 percent of their capital. They currently have forward contracts as much as 900 percent of capital, Yim said. For domestic banks the cap is much smaller at 50 percent of capital but most of them still have room to fill.
Korea is the first nation to adopt a specific limit on foreign exchange derivatives, the vice minister said.
“Each nation has its own vulnerability in its economy, and as for Korea, rapid capital flow is our weak point. Apart from international discussions on global reform plans such as a bank levy, we need domestic measures to protect our economy.”
Foreign bankers in Seoul, naturally, are skeptical and unhappy with the new regulations. Michael Hellbeck, the president of the Foreign Bankers Group Korea and chief of Deutsche Bank here, said they were consulted by the finance ministry and provided their views last week that the new rules would only increase the cost for bank customers.
“While we fully appreciate the desire for less foreign exchange volatility, we remain concerned that the new rules may not achieve that purpose,” he told The Korea Times. “In fact, the new rules, which limit the capacity of banks to provide foreign exchange hedging to their clients, are likely to increase the cost of hedging and will lead to increased activity in the offshore NDF markets.”
On the increasing cost of hedging, Yim, the vice minister, says that he acknowledges the problem but it is an inevitable side effect that should be endured by banks and their customers. “The point is that the whole economy has been burdened by the risk of excessive foreign exchange trading done by a few. So it is right for the few to bear more of the cost for their actions in the future,” he said.
The ministry also blamed manufacturing companies for using foreign exchange forward contracts as if they were betting in a casino, not as a hedging of risk. One company saw losses of 2.8 trillion won purely from buying excessive foreign exchange contracts from banks, Yim said. To prevent such mishaps, the forward transaction ceiling for exporters will be lowered to 100 percent of their transaction of real assets from the existing 125 percent.
The rapid movement of foreign exchange rates in recent months has caused policymakers and regulators to question the efficiency of the current regulatory framework for curbing speculation and stabilizing the rate.
Currency speculation is not a recent phenomenon. As much as $4 trillion is thought to be traded on international foreign exchange markets, and according to some estimates, only around 2 percent of this is related to real demand from businesses, travelers or governments, while the rest is purely profit-oriented speculation.
The finance ministry believes that most of the won’s recent fluctuations were caused by foreign banks making speculative bets in markets such as non-deliverable forwards (NDF).
But Hellbeck said the reform will only make the Korean won more vulnerable to speculative traders.
“The spread (gap) between onshore hedging prices and offshore hedging prices will widen, leading to speculative arbitrage opportunities for offshore players. It is like a balloon, which you squeeze at one end,” Hellbeck said.
While pursuing financial stability is the government’s primary goal of the reforms on the surface, it also wants to tame foreign banks and let them share some of their business with domestic banks, officials say.
“Foreign banks had 2 trillion won of net profit out of 100 trillion won of capital last year, while domestic banks had 7 trillion won of profit out of 1,800 trillion won of capital,” a high-ranking official said in a luncheon meeting with newspaper editors on Sunday.
새로운 외환 규제로 외국은행들 타격
정부는 일요일 금융의 취약성을 보완 하기위해 일요일 외환 관리에 대한 일련의 규제책을 발표했다.
새로운 규제의 도입은 국내 은행들에게 사실상 약 180억 달러 상당의 외국은행 업무를 제공하게 된다. 정부는 또한 선물환 거래에 대한 규제 강화로 갑작스런 외국자본의 유입을 막고 기업들이 환율에 투기를 하지 못하게 함으로써 국내 외환 시장을 안정화하는 데 도움을 줄 것으로 전망하고 있다.
규제 대상은 한국에서 영업을 하는 37개 외국은행으로 이들이 원달러 환율에 심한 변동을 일으키게 하고 환율에 대한 투기를 하는 주범으로 정책입안자들과 학계는 비난하고 있다.
임종룡 기획재정부 차관은 일요일 과천 정부청사에서 가진 기자회견에서 “새로운 규제에 따라 국내 및 외국은행에서 줄여야 할 선물계약은 약 187억 달러다. 그 가운데 182억 달러는 외국은행의 몫이다”고 말했다.
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