Authorities look to stem risks from currency speculation


The nation’s financial regulator and the central bank said Tuesday they would increase the number of banks dealing with foreign currency trading, which would be subject to their ongoing joint probe.

The period of their joint inquiry into the foreign exchange banks will also be extended, according to the Financial Supervisory Service and the Bank of Korea.

“Our inspection will be focused on examination of banks’ management of forward exchange positions and offshore non-deliverable forward trading,” the FSS said in a statement.

An FSS official said banks’ short-term foreign bonds have continued to increase since last December and shot up by more than $5 billion in March alone.

“It is tentatively estimated that the growth in foreign bonds in the first quarter surpassed $10 billion,” he said. “Such rapid growth needs to be observed, because it can serve as a risky factor that can undermine the stability of the country’s financial market.”

According to authorities, the sudden surge in short-term external debt is caused by thriving speculations aimed at profiteering from offshore NDF trading and the rise in forward exchanges due to the sudden inflow of orders to domestic shipbuilders.

Furthermore, the strong won is inviting more “hot money,” which may spread the volatility to the foreign exchange market.

The Bank of Korea and the FSS have been already conducting a joint inspection of foreign exchange banks since April 26.

After tentatively ending the probe on May 6, the authorities plan to restart the probe in mid-May as part of their moves to assess the causes of surge in foreign bonds and devise countermeasures.

The banking sector had already undergone a similar experience on the eve of the global financial crisis, when the nation’s short-term debt ― which had expanded to $134 billion by the end of 2007 ― flushed out during the 2008 global financial crisis, causing a dollar liquidity problem in Korea.

The Korean government has been trying to stem out the problem by regulating forward exchange positions and imposing taxes on bond investments for foreigners in the second half of last year.

By Kim Yon- se(kys@heraldcorp.com)