Korea-US Currency Swap Funds to Be Supplied to Market Starting Next Week (Comprehensive)

Bank of Korea "First round of funding supply to greatly exceed 4 billion dollars"
Government eases foreign currency borrowing costs for financial firms
Exemption from foreign exchange soundness burden charges
Temporary relaxation of LCR regulatory ratio

[Image source=Yonhap News]

[Asia Economy Reporters Eunbyeol Kim and Sehee Jang] The government and the Bank of Korea have taken steps to establish a more stable foundation for securing foreign currency in preparation for domestic foreign currency liquidity shocks. The Bank of Korea plans to finalize the main contract for the dollar swap with the U.S. Federal Reserve (Fed) within this week and begin supplying funds to the market starting next week. The government has decided to exempt the foreign exchange soundness charge to ease the foreign currency borrowing costs of financial institutions and temporarily relax the foreign currency Liquidity Coverage Ratio (LCR) regulatory burden on banks.

Yoo Sang-dae, Deputy Governor of the Bank of Korea, stated on the 25th, "We are currently conducting working-level consultations with the U.S. Fed and aim to supply funds next week." The main contract will be signed within this week, and the first supply is planned for next week. Deputy Governor Yoo added, "In 2008, $4 billion was supplied in the first round, but this time, we will supply a much larger amount than $4 billion." Currently, the Bank of Korea is negotiating with the Fed on the ▲first supply amount ▲supply method ▲interest rate, among other details. Although the total limit for this currency swap is set at $60 billion, it will not be supplied all at once. The Bank of Korea previously signed a Korea-U.S. currency swap worth $30 billion during the 2008 global financial crisis. At that time, five auctions were held, supplying a total of $16.4 billion.

An environment has also been created to make it easier for financial institutions to procure foreign currency. Hong Nam-ki, Deputy Prime Minister and Minister of Economy and Finance, stated at the second crisis management meeting on the same day, "We will actively support the private sector's efforts to procure foreign currency by easing macroprudential regulatory measures in the foreign exchange sector introduced after the 2008 financial crisis."

First, to facilitate foreign currency procurement by the private sector, the government will temporarily exempt the foreign exchange soundness charge imposed on financial institutions. The foreign exchange soundness charge is a system introduced in August 2011, whereby the government imposes a certain percentage charge on non-deposit foreign currency liabilities held by financial institutions.

The foreign exchange soundness charge is calculated by multiplying 10 basis points (1bp = 0.01 percentage points) by non-deposit foreign currency liabilities with a remaining maturity of one year or less. Exempting this charge will have the effect of lowering the cost for financial institutions such as banks, securities firms, insurance companies, and card companies to borrow foreign currency. A Ministry of Economy and Finance official said, "Financial institutions will have reduced burdens from foreign currency borrowing and will be able to operate borrowed foreign currency at lower interest rates. Also, temporarily lowering the charge may create incentives to borrow more foreign currency."

Additionally, the foreign currency LCR regulatory ratio for banks will be temporarily relaxed from the current 80%. The foreign currency LCR is the ratio of high-liquidity foreign currency assets to net foreign currency outflows over the next 30 days and serves as an indicator of financial institutions' foreign exchange soundness. Measures under discussion include relaxing the regulation from the current 80% to the 60% range (the 2017 level).

Deputy Prime Minister Hong explained, "Our current foreign exchange reserves and net external debt scale, among other external soundness indicators, are distinctly different from those during past financial and foreign exchange crises. It is important to restrain excessive anxiety and overreactions while ensuring that the government, banks, and companies thoroughly prepare and respond proactively to avoid being shaken by domestic and international market volatility." He added, "The government will monitor the domestic foreign currency liquidity situation daily and proactively establish a multi-layered foreign currency liquidity supply system to ensure that companies and financial institutions do not face difficulties in securing foreign currency liquidity, implementing it in a timely manner."

Following the government's foreign currency liquidity measures, the domestic foreign exchange market is stabilizing. At 10:24 a.m. on the same day in the Seoul foreign exchange market, the won-dollar exchange rate was trading at 1,230.80 won, down 19.05 won from the previous day.

This content was produced with the assistance of AI translation services.