March 24, 2020 / 11:08 PM / 16 days ago

UPDATE 2-S.Korea to temporarily loosen capital flow rules further, inject dollars

* S.Korea has various layers of tools to boost FX liquidity

* BOK to inject dollar liquidity into onshore markets this week (Adds BOK’s plans to inject dollar liquidity)

By Cynthia Kim

SEOUL, March 25 (Reuters) - South Korea said on Wednesday it will further loosen key capital flow rules temporarily to encourage local financial institutions to supply more dollars as the coronavirus pandemic continues to send shock waves through global markets.

The government plans to temporarily relax the FX liquidity coverage ratio (LCR) for banks and waive a levy on foreign currency borrowing, finance minister Hong Nam-Ki said in a policy meeting, according to a written copy of his speech.

The FX LCR ratio requires banks to hold high-quality assets that can readily be converted into cash within 30 days.

Currently, the government asks domestic banks to meet 80% FX liquidity coverage ratio, meaning the amount of easy-to-sell foreign assets must be at least 80% of its expected cash outflows in times of stress.

The new ratio will be announced later this week, Hong said.

“The government will assess local dollar liquidity conditions on a daily basis and prepare various layers of tools to supply dollars in a timely manner, in order to make sure companies and financial institutions don’t experience dollar shortages,” Hong said.

South Korea has deployed a number of steps since 2010 to smooth hot money flows that often cause sharp swings in the won .

The revision of capital flow rules adds to a series of steps Asia’s fourth-largest economy has taken to put a floor on crashing markets across currencies and equities, including a 100 trillion won ($80 billion) rescue package announced on Tuesday to save distressed businesses and loosening of currency forward rules for banks.

The Bank of Korea is also one of nine central banks the U.S. Federal Reserve has signed new dollar swap lines with in a coordinated action to prevent the coronavirus pandemic from causing a global economic rout.

The agreement with South Korea is a $60 billion bilateral currency swap facility for at least six months.

A senior BOK official said on Wednesday the central bank plans to inject dollars into local financial markets this week using the swap with the Fed to ease a growing dollar shortage, which is likely to be “much bigger” than $4 billion in its first batch. (Editing by Raju Gopalakrishnan and Jacqueline Wong)

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