Prudential Regulations

Foreign Exchange Positions

The foreign exchange position of a foreign exchange bank is the difference between its foreign currency assets and liabilities resulting from the trading of foreign exchange. Certain limits are placed on the daily foreign exchange positions that a foreign exchange bank may hold. The purpose of limits on foreign exchange positions is to encourage the sound management of foreign exchange banks through preventing possible exchange rate risks caused by heavy or over-exposed foreign exchange positions, and to prevent any disruption of the domestic foreign exchange market as a result of abrupt shifts in their foreign exchange positions by foreign exchange banks. Any over-bought (or over-sold) foreign exchange positions must be within the amount equivalent to 50 percent of capital as of the end of the previous month.

Reserve Requirements for Foreign Currency Deposits

A foreign exchange bank must maintain reserves amounting to a prescribed proportion of its foreign currency deposit liabilities, in the form of foreign currency deposits with the central bank. The minimum ratios of reserves relative to resident foreign currency deposits are the same as those for domestic currency deposits, i.e. 2% for time deposit, installment savings deposit, certificates of deposit and 7% for demand deposits, while the ratios of reserves relative to foreign currency deposits by nonresidents and by other banks are both 1%.

Foreign Exchange Derivatives Positions

Certain limits are placed on the daily foreign exchange derivatives positions that a foreign exchange banks may hold. The purpose of limits on foreign exchange derivatives positions is to contain any excessive increases in short-term foreign debts as firms engage in forward exchange transactions to hedge foreign exchange risks. The foreign exchange derivatives position of a bank must be within a certain specified level relative to its equity capital at the end of the previous month(50% for domestic banks and 250% for foreign bank branches).

Foreign Exchange Stability Levy

Financial institutions are required to pay a foreign exchange stability levy of 0.1% on the balances of their non-deposit foreign currency liabilities with remaining maturities of less than one year. The purpose of the foreign exchange stability levy is to curb excessive foreign borrowings and to encourage financial institutions to lengthen their foreign debt structures. The collected levies are used to provide foreign currency financing to financial institutions in cases of crisis.

Foreign Currency LCR (Liquidity Coverage Ratio)

The foreign currency liquidity coverage ratio (LCR) regulation is a system to strengthen foreign exchange banks resilience against liquidity shocks and to promote the building up of liquidity buffers against short-term liquidity crises. A foreign exchange banks must have sufficient high-quality liquid assets that can be easily converted into cash to meet its liquidity needs over a 30-calendar day time horizon under conditions of significant liquidity stress.

1. Note : ^* With the exceptions of ⅰ) commercial banks with foreign exchange debts of less than 5 % of their total debt and USD500 million or less in foreign exchange debt, ⅱ) the Export-Import Bank of Korea (KEXIM), and ⅲ) branches of foreign banks operating in Korea