South Korea plans to cut limits on banks' foreign exchange derivatives positions, a regulator source said on Wednesday, following the announcement early this month of a plan to introduce new capital control measures. The ceiling will be lowered to 40 percent of equity capital for domestic banks from 50 percent now and to 200 percent for branches of foreign banks from 250 percent now, the official at the Financial Supervisory Service told a group of reporters.
The government will likely make the official announcement next month, the official said. The current ceilings were set in June and the authorities have said they would review data every quarter to make possible adjustments to the ceilings. The lowering of the limit is unlikely to effect bank operations and exporters' currency hedgings, the official said, declining to be named. "Currently, foreign bank branches' positions are under 150 percent and local bank's positions are under 10 percent, so I don't see any big impact," he said.
Emerging-market economies are grappling with the flood in capital coming from the advanced economies where the still depressed demand prompted authorities to keep the interest rates near zero and financial system flush with easy money. Earlier this month, Seoul said it would impose a levy on banks' foreign debt from late 2011, the latest capital controls it adopted to mitigate the impact a sudden reversal in capital flows may have on its economy. Taiwan's central bank has inspected non-deliverable forwards and foreign exchange operations at banks including Citibank as it steps up its efforts to ease currency volatility.
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