Financial Authorities "Financial Firms Exempt from Foreign Exchange Soundness Burden Fee for 3 Months and LCR Regulation Eased to 70%" (Comprehensive Report 2)

26th 'Macroeconomic Financial Meeting' Held
Futures Exchange Position Limit Raised by 25%

[Image source=Yonhap News]

[Sejong=Asia Economy Reporters Kim Hyun-jung and Jang Se-hee] Financial authorities are lowering the foreign currency liquidity coverage ratio (LCR) for domestic financial institutions from the existing 80% to 70% to secure foreign currency liquidity. Additionally, to reduce overseas borrowing costs for financial companies, foreign currency soundness charges will be exempted for the next three months.

The Ministry of Economy and Finance, Financial Services Commission, Bank of Korea, and Financial Supervisory Service held a macroeconomic and financial meeting on the 26th and made this decision. This move aims to facilitate the supply of foreign currency liquidity domestically as the preference for the dollar intensified due to ongoing instability in the international financial market caused by the recent spread of the novel coronavirus (COVID-19).

Kim Yong-beom, First Vice Minister of the Ministry of Economy and Finance, stated, "We will temporarily apply the foreign currency liquidity coverage ratio regulation for domestic banks at 70% for three months until the end of May, enabling banks to respond proactively and flexibly to foreign currency liquidity supply and demand and to support trade finance smoothly."

The LCR is the ratio of liquid assets that can be converted into cash within the next 30 days to the net foreign currency outflows during the same period. It is a soundness regulatory indicator that gauges whether a financial institution can overcome liquidity crises on its own. Lowering the regulatory ratio allows banks to supply foreign currency funds more smoothly to the market or companies.

The related regulation began to be applied in 2017. Since then, for general banks, the ratio was raised by 10% annually: ▲60% in 2017 ▲70% in 2018 ▲80% in 2019. Now, it will be relaxed back to 70%. For example, if a bank has cash liabilities of 10 billion dollars to be paid within one month, it was required to hold liquid assets worth 8 billion dollars for the same period, but this will be lowered to 7 billion dollars.

The government also decided to exclude financial companies from the foreign exchange soundness charge imposition for the next three months. For the charges confirmed last year and scheduled to be collected this year, payment deferrals will be allowed through expanded installment payments. The temporary exemption of foreign currency soundness charges reduces the cost of borrowing foreign currency for financial institutions such as banks, securities firms, insurance companies, and card companies.

Vice Minister Kim emphasized, "Efforts to stabilize the foreign exchange and foreign currency funds markets and supply foreign currency liquidity may temporarily reduce foreign exchange reserves," but added, "We have accumulated sufficient foreign exchange reserves, and with the strengthening of external safety nets such as the Korea-US currency swap agreement, our external soundness will remain solid without change."

Previously, the government decided to expand the forward foreign exchange position limit of banks by 25% to prevent difficulties in foreign currency procurement for companies and financial institutions.

Furthermore, Vice Minister Kim urged commercial banks to respond more actively and boldly. He said, "The establishment of a 1.07 trillion won Securities Market Stabilization Fund was the result of the government and financial industry working together with the determination to prevent the COVID-19 crisis from spreading to the entire financial system," and added, "Considering that banks are the core of the credit system, I hope commercial banks will respond actively and boldly to companies temporarily facing difficulties due to COVID-19."

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