Regulator holds meeting on foreign exchange market stabilization; urges banks to comply with trading norms on their own
South Korea's Financial Supervisory Service has ordered banks to scale back aggressive dollar deposit campaigns and tighten management of their foreign exchange positions, responding to a recent surge in currency market volatility. The regulator said it plans to conduct joint inspections to crack down on speculative foreign exchange trading and market-disrupting activity.
The FSS held a meeting Tuesday on foreign exchange market stabilization, chaired by Kim Seong-uk, deputy governor for banking and small finance, and conveyed those intentions to the banking sector.
The meeting followed a joint interagency gathering with banks on Monday and was convened to review recent trends in the foreign exchange and foreign currency funding markets, and to discuss concrete measures with banks to address the widening volatility.
Executives in charge of foreign currency and funding at major commercial banks — including KB Kookmin, Shinhan, Hana, Woori, NH NongHyup and SC First Bank — as well as domestic branches of foreign banks including State Street Bank and HSBC attended the meeting. Participants agreed on the need to ease the excessive volatility and one-sided directional moves seen recently in the foreign exchange market.
"Banks should comply with foreign exchange market trading norms on their own and strengthen internal controls to prevent market-disrupting activity," Kim said, adding that banks must prepare for any further escalation of excessive volatility.
The FSS said banks should refrain from running aggressive promotions or campaigns to attract dollar deposits given the current high-volatility environment, and should do more to inform customers of the risks of exchange-rate losses.
The regulator also urged banks to avoid speculative foreign exchange trades that could drive excessive won weakness, and reiterated that it would take strict action against market-disrupting behavior such as manipulating market prices. It particularly called on banks to cooperate actively in ensuring that non-deliverable forward derivative transactions do not amplify volatility or exacerbate one-sided moves in the domestic foreign exchange market.
For major banks, the FSS said it plans to temporarily shorten the monitoring cycle for foreign exchange position checks from monthly to weekly or even daily.
The regulator also said it would extend by six months — from June to the end of this year — a grace period on supervisory measures tied to an upgraded foreign currency liquidity stress test, asking each bank to strengthen its own foreign currency liquidity management in the meantime.
The FSS said it plans to conduct joint inspections with the Bank of Korea to determine whether speculative trading or market manipulation has taken place amid the recent volatility and won weakness. If inspections uncover attempts to move or fix foreign exchange rates for illicit gain, those responsible face up to five years in prison or fines of up to 500 million won (about $323,000).
"We will closely monitor market conditions in preparation for any continued expansion of foreign exchange market volatility," an FSS official said, adding that the agency plans to work closely with related ministries.
After breaching the 1,550-won level against the dollar on Monday, the won strengthened more than 20 won during Tuesday's session, falling below 1,510 won intraday, as authorities signaled their commitment to market stability.
The won closed the weekly trading session in the Seoul foreign exchange market at 1,512.1 won per dollar, down 22.9 won from the previous session. That was the strongest level since June 1, when the rate stood at 1,504.3 won.
ehkim@heraldcorp.com
