South Korea Implements Further Measures to Address FX Liquidity Issues

The government will loosen the foreign exchange liquidity coverage ratio for banks.

South Korea has taken another step to try and counteract liquidity issues for the United States dollar (USD), with the Ministry of Economy and Finance announcing that it plans to loosen the foreign exchange (forex) liquidity coverage ratio (LCR) for banks.

According to a report from Reuters, the LCR for banks will be relaxed for three months, with the aim to motivate them to supply more dollars into South Korea’s local markets, as COVID-19 continues to create liquidity issues.

In particular, the vice minister of the Ministry of Economy and Finance Kim Yong-beom outlined that the FX LCR will be loosened to 70 percent, down from the current 80 percent. This will be in place until May-end, the news outlet reported.

The measures announced today require banks to hold less of easy-to-sell foreign assets. The vice minister also highlighted that the country’s government expects forex reserves to be temporarily reduced, as some will be used to ease liquidity shortages, Reuters said.

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South Korea continues to address liquidity issues

Earlier this month, the ministry, alongside the Bank of Korea (BOK), announced they would be implementing another measure, which also aims to address the USD shorting in Korea’s local markets.

As Finance Magnates reported, the two authorities said that the cap on foreign currency forward positions that local banks were allowed to hold would be increased to 50 percent of their equity capital from the 19th of March, 2020.

Prior, banks were allowed to hold 40 percent. For foreign banks, the cap was also raised from 200 percent up to 250 percent.

At the time, the South Korean Finance Ministry said that by raising the ceiling, it is expected to help address the mismatches in dollar liquidity in the country’s derivatives markets, as traders increasingly flock to the USD, which is seen as a safe haven currency amid the deepening economic impact of the coronavirus pandemic.

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