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S. Korea: BOK Proposes Permanent Foreign Currency Swaps
Source: koreaherald.com
Source Date: Sunday, May 30, 2010
Focus: Knowledge Management in Government, Institution and HR Management
Country: Korea (Republic of)
Created: May 31, 2010

Korea proposed a permanent arrangement for central banks to swap foreign currencies to help address the type of funding shortages that emerged during the global financial crisis. The “broadening and institutionalization” of the measures could help establish “a global financial safety net,” Bank of Korea Governor Kim Choong-soo said in the text of a speech to be delivered today in Seoul at a conference of central bankers. Kim’s proposal comes five days before Group of 20 finance chiefs gather to discuss strengthening efforts to prevent financial crises. Federal Reserve Chairman Ben S. Bernanke, who’s among officials due to speak to the Korean forum, has opposed swaps as a “permanent service,” seeking instead to pressure banks into better managing their funding needs across different currencies.

Korea’s Kim said his proposal could cut the need for emerging economies to hold large quantities of foreign-exchange reserves as insurance at a “substantial” economic cost. His comments were for a two-day forum, hosted by his bank, on “The Changing Role of Central Banks.” A reemergence of financing strains, sparked by the European debt crisis, spurred the Fed to resuscitate currency-swap arrangements with the central banks of the euro region, U.K., Switzerland, Canada and Japan this month. The step came just three months after the Fed had closed its swap lines from the crisis sparked by the collapse in U.S. mortgage securities.

The rate banks pay for three-month loans in dollars rose to the highest level since July 2009 last week as the European Union’s near-$1 trillion support plan in the wake of Greece’s budget crisis failed to encourage banks to step up lending. The London interbank offered rate, or Libor, for such loans increased to 0.538 percent on May 27. Bernanke said last week in Japan that while swap lines played an important role in establishing stability during the global financial crisis, “we don’t necessarily want to be providing a permanent service for financial markets.”

“There’s a good case that we should put pressure, or at least try to influence, banks to better manage these currency mismatches, or if not currency mismatches the fact that they are relying on dollar funding and there are difficulties in achieving the funding that they need,” the Fed chief said. In October 2008, the Fed added Korea, Brazil, Mexico and Singapore to its swaps. Korea also had arrangements with the central banks of China and Japan. In the swaps, central banks exchange foreign currency with an agreement to reverse the transaction at a later date. The central banks will then lend the money at fixed rates to firms in their countries.

Kim said that while his nation had benefited greatly from the arrangements, they had shortcomings including their ad-hoc nature and “the high selectivity of the counterparties involved.” He cited East Asia’s so-called Chiang Mai Initiative, a currency swap arrangement between Korea, Japan, China and the Association of Southeast Asian Nations as “significant regional progress.” The forum in Seoul is also to be addressed by European Central Bank President Jean-Claude Trichet, who, like Bernanke, is to speak via video.
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