Wed, Oct 06, 2010 - Page 10 News List

Won plunges on bank audit news

Bloomberg

South Korea’s won dropped the most in six weeks after the government announced plans to audit banks’ foreign-exchange trading, spurring concern that regulators were clamping down on bets the currency will appreciate.

The won weakened for the first time in seven days as technical indicators signaled the recent rally was excessive. The Bank of Korea and the Financial Supervisory Service will conduct a joint audit between Oct. 19 and Nov. 5 on currency swaps and options to check if banks are complying with measures announced on June 13, according to an e-mailed statement from the South Korean Ministry of Strategy and Finance yesterday.

Domestic lenders in June were ordered to reduce holdings of the derivatives over the next two years to 50 percent of equity capital and branches of foreign banks in South Korea to 250 percent beginning on Saturday. They were instructed not to raise holdings beyond a July 9 deadline.

“We think the gains in the won were a bit fast,” Doh Boe-un, an official at the financial regulator who is involved in the audit, said in an interview in Seoul. “We want to see the market stabilize and the measures are expected to curb volatility.”

“The focus will be on changes in banks’ forward positions after they were given a three-month grace period before the rules start on Oct. 9,” the ministry said in the statement.

Banks under examination will be notified by early next week and the number to be scrutinized may increase, Doh said, without mentioning how many will be checked.

Forwards are agreements in which assets are bought and sold at current prices for future delivery. Banks often borrow foreign currencies to offset exposure to price swings on the contracts.

South Korea is prepared to battle speculators as needed by intervening in the currency market, the ministry said on Monday in a report.

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