BOK Ups Ante for Reserve Efficiency
By Na Jeong-ju
Staff Reporter
The central bank is actively taking steps to more effectively manage its bloated foreign exchange reserves as the value of the reserves has been falling due to the dollar’s weakness.
In a departure from its conservative stance on the use of currency reserves for investment purposes, the Bank of Korea (BOK) yesterday said it will increase its lending of foreign currencies to local banks to promote their overseas securities investments.
Beginning this month, banks will be allowed to use the loans from the BOK to buy foreign stocks and bonds. Banks can exchange up to $5 billion worth of Korean currency into dollars at the central bank through currency swap deals, and invest the money in overseas securities markets.
In addition, the central bank has permitted banks to lend dollars to companies as part of efforts to boost overseas investments.
The measures are expected to fuel demand for dollars in the currency market, helping stem the won from becoming stronger against the dollar. At the same time, the BOK can use its won reserves to ease its deficit, which has grown sharply in recent years, BOK officials said.
``The growing foreign exchange reserve has been of great concern to us,’’ a BOK official said. ``To cope with the problem, we plan to expand the use of currency reserves for companies and banks. To some extent, this will be helpful in easing the surging deficit at the central bank.’’
Foreign exchange dealers work in the dealing room of the Korea Exchange Bank headquarters in Seoul, Thursday, as the won extended its gains against the yen. The won posted a modest downward correction yesterday as it closed at 779.72 won per 100 yen, down 0.31 won.
The country’s foreign currency reserves increased $28.6 billion last year to $238.9 billion, marking the world’s fifth largest holder of foreign currencies. China is the largest holder of foreign currencies with $1.01 trillion as of the end of October, followed by Japan with $896.9 billion, Russia with $283.4 billion and Taiwan with $265.1 billion, according to the central bank.
The sharp rise of foreign exchange reserves is largely due to the rise in the issuance of currency stabilization bonds. Also responsible were increased earnings from investments of reserves in overseas securities and a hike in the foreign currency reserve requirements.
In late December, the central bank raised the required reserve ratio on foreign currency demand deposits by two percentage points to 7 percent in a bid to curb market liquidity amid soaring property prices. Foreign exchange reserves consist of securities and deposits denominated in foreign currencies along with International Monetary Fund reserve positions, special drawing rights and gold bullion.
The country’s foreign currency reserves have been growing steadily as currency authorities have stepped up their intervention in currency trading as the dollar weakens. They continued to buy dollars to curb the won’s strength against the dollar.
The BOK began currency swap deals with commercial and state-owned banks in July last year in a bid to prevent the dollar from weakening on the local currency market. As of Dec. 15, currency swap deals between the BOK and banks stand at $500 million, but the transactions are expected to grow sharply in the coming months.
The central bank recorded a 1.4 trillion won deficit in the first six months of the year largely due to rising interest payments on monetary stabilization bonds it issued to absorb liquidity and stabilize the currency market. It posted 1.87 trillion won in losses in 2005 and a 150 billion won loss in 2004.
jj@koreatimes.co.kr
01-04-2007 19:03
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