Compulsory Foreign Currency LCR Becomes Effective Next Year

The Ministry of Strategy & Finance and the Financial Services Commission of South Korea announced on June 16 that a compulsory foreign currency liquidity coverage ratio (LCR) becomes effective in January next year. The foreign currency LCR refers to the ratio of high-liquidity foreign currency assets to foreign exchange estimated to be subject to a 30-day bank run in the event of a financial crisis.

A foreign currency LCR of 60% is scheduled to be applied to banks in general next year before the ratio is raised to 70% and 80% in 2018 and 2019, respectively. During the same period, the percentage that is applied to special-purpose banks, such as the Industrial Bank of Korea (IBK), NH Nonghyup Bank and Suhyup Bank, is raised from 40% to 60% and then to 80% and that applied to the Korea Development Bank (KDB) is adjusted from 40% to 50% and then to 60%. The Export-Import Bank of Korea, branches of foreign banks located in South Korea, and Jeonbuk Bank, Jeju Bank and Gwangju Bank, each with a foreign currency debt of less than US$500 million, are exempted from the implementation.

Each bank’s monthly average foreign currency LCR is to be the reference index. The financial authorities are planning to raise the ratio by five percentage points per violation when it fails to meet the target three times or four times and block new foreign currency borrowing until the target is met once the number of violations exceeds four.

The foreign currency LCR is to replace five different regulations for the stability of the forex market that are included in the Banking Supervision Regulations. The forward position limit is to be relaxed as well. Specifically, it is to be adjusted from 30% to 40% for South Korean banks and from 150% to 200% for foreign bank branches so that those banks can have more room for foreign currency borrowing.