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Yahoo! My Yahoo! Mail More Yahoo! Services Account Options New User? Sign Up Sign In Help Yahoo! Search web search Home Singapore Asia Pacific World Business Entertainment Sports Technology Singapore Asia Pacific World S.Korean FX control review spooks foreign investors Reuters - Saturday, October 17 Send IM Story Print * Govt may impose controls on foreign bank liquidity * Task force team studying measures * Bond futures tumble on record foreign selling * Head of foreign bank branch warns against controls * Measures seen as way to protect against capital flight By Lee Shin-hyung and Kim Yeon-hee SEOUL, Oct 16 - South Korea may impose controls on foreign bank liquidity in measures seen aimed at protecting the economy against capital flight but which triggered a record sell-off in treasury bond futures by foreign investors. Apart from restricting the operations of foreign banks in South Korea, which include JPMorgan Chase <JPM.N> and BNP Paribas <BNPP.PA>, the measures could make it harder for local firms to borrow, analysts said. "Volatility in the South Korean foreign exchange market has increased, and we are studying measures to stabilise the market," Jong-Goo Yi, a standing commissioner of the Financial Services Commission, told reporters. "Given the global move to boost liquidity, we are considering the liquidity matter," he said. A senior Finance Ministry official told Reuters late on Thursday that a task force was reviewing controls on foreign currency liquidity ratios at foreign banks but that any controls would be implemented gradually. Analysts said authorities appeared to be looking at ways to avoid a repeat of the capital flight that occurred during the global financial crisis when the won tumbled some 40 percent against the dollar. The flight was partly fuelled by foreign banks in Korea repatriating funds as well as investors withdrawing their funds concerned about heavy foreign short-term debts. They said tighter controls would also squeeze out some of the liquidity in the financial system that is being blamed on a sharp rise in mortgages and house prices. Treasury bond futures <0#KTB:> tumbled on the news. Foreign investors sold a net record 24,177 government bond futures contracts worth the equivalent of $2.25 billion, the Korea Exchange said. [ID:nSEO136426] December futures dropped to 108.32 from 108.83. The market was also rattled by comments by the central bank chief late on Thursday suggesting that when interest rates do eventually go up they will do so in big steps. [ID:nSEO72462] The liquid 3-year treasury bond yield <KR3YT=KSDA> shot up to a two-month closing high. "Foreign investors had every reason to dump debt today, rattled by growing uncertainty over rate hikes growing after the BOK chief's comments, currency control talk, and worsening currency swap market conditions," Eugene Futures' fixed income analyst Jung Sung-min said. Foreign bank branches account for about 17 percent of Korea's treasury market, holding a total of 50 trillion won worth of the government debt, so can have a significant influence on trading. OPTIONS The government may opt to control the amount of foreign currency that foreign bank branches can borrow from their headquarters by tightening the criteria on foreign currency liquidity ratios, analysts said. Such ratios are already applied to Korea banks but not foreign bank branches. It may also restrict currency hedging by domestic companies. "The government is practicing a lesson from the 2008-09 financial crisis ... We were seriously hit by sudden outflows of excessive foreign currency liquidity," said Jeong My-young, a currency strategist at Samsung Futures Inc. "That money can get out of this country immediately, which will cause similar problems again," she added. There may also be concerns that once South Korea does start raising interest rates, which many analysts expect in the first quarter of 2010, domestic borrowers will flock abroad for loans in major economies which have lower rates anyway and which are likely to be far slower in raising them. That would weigh on Korea's external balance sheet, which had been a major concern for investors when the global financial crisis blew up. Central bank Governor Lee Seong-tae hinted at that concern when he told lawmakers the country needed additional measures to deal with massive foreign currency liquidity outflows. IMMEDIATE CRITICISM The comments on tighter regulations brought immediate criticism from the head of JPMorgan Chase in Seoul, who warned consequences could be reduced lending to local firms, less liquidity in the swaps market and even the withdrawal of some foreign banks from Asia's fourth-largest economy. "What the government should worry about is not short-term foreign currency liquidity, but a possible disappearance of foreign demand for South Korean debt," the head of JPMorgan's Seoul branch, Sung-hee Lee, told Reuters. "Foreign banks' branches are providing liquidity to domestic banks through spread swap deals. Therefore liquidity controls could affect domestic banks ... Now that short-term foreign borrowing has been declining, would it be right for the government to impose a regulation?" Lee said that the combined value of short-term foreign currencies debt owed by domestic companies to foreign bank branches had fallen to $70 billion after the collapse of Lehman Brothers from a peak of $90 billion, mainly because of reduced valuation. The won tumbled to more than 1,500 per dollar in March from around 1,000 just before Lehman's collapse. The economy and markets have rebounded since the crisis eased. The won <KRW=> touched its highest level in almost 13 months against the dollar on Thursday. (Additional reporting by Cheon Jong-woo, writing by Jonathan Thatcher, editing by Yoo Choonsik and Neil Fullick) Recommend Send IM Story Print Related Articles Tata Consultancy Services net profit up 28.7 pct AP - Saturday, October 17 SandRidge bank group reaffirms borrowing base AP - Saturday, October 17 Spanish language La Frontera ceases publication AP - Saturday, October 17 Brigham Bakken well flows 2,112 boepd, shares rise AP - Saturday, October 17 Nokia reshuffles executive team after poor Q3 AP - Saturday, October 17 News Search Top Stories UN rights council endorses damning Gaza report Strong euro threatens Europe recovery: Eurogroup Bank of America reports 1.0-billion-dollar loss Giants, Saints put their perfect records on the line Pacific islands meet over climate change plan More Top Stories » ADVERTISEMENT Most Popular Most Viewed Most Recommended Boy found alive at home after helium balloon drama French court denies woman dead husband's sperm Boy in balloon drama found alive: US police Bill Gates pledges 120 million to boost African, Indian farmers Avril Lavigne to divorce: reports More Most Viewed » Oldest hominid skeleton sheds light on human origins Boyzone singer Gately dies in Spain More Most Recommended » Elsewhere on Yahoo! 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