South Korea overhauls capital control rules, tells banks to prepare for sudden outflows

Forex regulations will be eased.

South Korea is priming its banks for crisis. Regulators will ease forex liquidity regulations for banks in preparation for potential capital outflows and less accommodative US monetary policy.

In a joint statement, the Ministry of Strategy and Finance and the central bank noted that caps of FX forward positions will be raised starting July 1. Caps for local banks will be raised from 30% to 40%, while caps for foreign bank branches will be raised from 150% to 200%.

The regulators will also revise laws to temporarily impose lower rates in case of sudden capital outflows. While banks will be required to meet the Basel III liquidity coverage ratio by 2017, the government will revise laws to temporarily require lower ratios in case of a crisis.

“The decision was made as foreign capital inflows have been stabilized amid the US monetary policies getting less expansionary while there is a need to be prepared for outflow increases that may follow the impending external risks, such as the outcomes of Brexit, Fed’s rate hike and the US presidential election,” the statement noted.