South Korea aims to apply a levy on banks’ foreign-exchange borrowings to prevent any repeat of the sudden capital outflows that caused a financial crisis more than a decade ago.
The toll will be imposed on non-deposit foreign-currency liabilities held by all domestic and foreign banks, according to a joint statement released Sunday by the Ministry of Strategy and Finance, the Bank of Korea and the Financial Supervisory Service. It will be proposed to the National Assembly in February, and will take effect after July 1 if approved, Vice Finance Minister Yim Jong Yong said.
“We wanted to regulate systemic risk from excessive capital inflows and outflows, and we decided implementation of a bank levy would be good to reduce volatility,” Vice Finance Minister Yim said at a press conference in Seoul after the measure was announced.
Short-term debt, which poses a greater risk, will be subject to a higher levy than long-term borrowing, the statement said, adding that the banks will pay in U.S. dollars. The government is considering a 20 basis point levy on debt maturing in less than one year, subject to change after further consultation, Yim said. A basis point is 0.01 percentage point.
Proceeds from the charge will be used to provide liquidity to financial institutions in times of risk, Yim said.
The measure comes as the flow of global funds into emerging markets is accelerating amid low interest rates in developed nations and the Federal Reserve’s quantitative easing, the statement said. The country is “highly vulnerable” to extreme changes in the global economy and sudden capital movements, it added.
“It is a prudent move over the long term,” Singapore- based Wai Ho Leong, senior regional economist at Barclays Capital, said today. “As banks grow their businesses by funding from Korean won sources, the problem of large and sudden inflows should gradually dissipate.”
Nations from China to South Africa are striving to limit currency volatility as near-zero borrowing costs in advanced economies spur demand for higher-yielding assets in emerging- markets.
South Korea may also tighten its cap on banks’ holdings of foreign-exchange derivative after completing a review on Jan. 9, Yim said today. The government in October imposed a limit of 250 percent of equity capital on foreign banks and 50 percent on domestic banks to reduce volatility in capital flows and trading of the won.
The government will also strengthen punitive measures on reporting of foreign-exchange activity, according to the statement. Domestic banks held $168.9 billion in non-deposit foreign-currency liabilities as of October and foreign bank branches had $104.6 billion, it added.
Bank of Korea Governor Kim Choong Soo said on Dec. 13 that the nation needs to use “macro-prudential” measures to reduce the volatility of the won because sharp fluctuations are an obstacle to financial-market stability.
South Korea’s won has appreciated 33 percent since February last year, the most in Asia, dampening the nation’s export- driven economic expansion. The currency closed at 1,152.58 to the U.S. dollar on Dec. 17.
U.S. Federal Reserve Chairman Ben S. Bernanke said on Dec. 5 the purchase of more Treasuries beyond the $600 billion announced is “certainly possible,” which would boost the supply of dollars that can be invested in emerging-market assets.
South Korean regulators began an audit of how banks should handle foreign-currency derivatives on Oct. 19 to tackle speculation. The National Assembly on Dec. 8 passed a bill that will from Jan. 1 tax interest income from treasury and central bank bonds by as much as 14 percent and put a 20 percent levy on capital gains from their sale.
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