South Korea to limit banks' currency trading to ease volatility
South Korea unveiled limits on banks' currency trading in an effort to ease volatile capital flows and stabilize the won, media reports on Sunday said.
The country, Asia's fourth-largest economy, says that sharp inflows and outflows of capital have unsettled the economy and led to economic downturn, The Wall Street Journal reported.
Reducing banks' short-term offshore borrowing and unnecessary use of loans denominated in foreign currency will help resolve the problem, South Korean authorities said, according to the Journal.
A volatile currency, including South Korea's won, creates difficulties for exporters and instability in markets. The won tends to move more than other currencies in a given direction, and foreign investors often use it as a leveraged play on the Asian economy and risk sentiment, the Journal reported.
Local banks must adjust their forward currency positions to half their capital as measured at the end of the preceding month, the Journal reported.
Foreign banks operating in South Korea must lower their positions to 250% of their capital, the paper said, adding that foreign banks' forward positions averaged 300% of their capital at the end of April.
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