S.Korea to oblige banks to raise FX liquidity ratio ahead of U.S. rate hike

South Korea on Thursday announced a plan to oblige banks to raise foreign currency liquidity ratio to prevent potential foreign capital outflows ahead of interest rate hikes in the United States and a British referendum on Brexit, or British exit from the European Union (EU).

Currently, banks are recommended to hold high-quality foreign currency liquid assets, which can easily be converted into cash, at a ratio of 50 percent to total foreign currency exposure that can be withdrawn within 30 days.

Banks will be obliged to raise the foreign currency liquidity coverage ratio (LCR) to 60 percent from next year. It will be raised by 10 percentage points annually to reach 80 percent by 2019, according to a joint statement from the Finance Ministry and the financial regulator.

The obligation of owning larger liquid assets was imposed on worries that foreign capital may abruptly flow out of the South Korean financial market if the U.S. Federal Reserve hikes rates going forward.

The Fed refrained from altering rates at the June rate-setting meeting overnight, but it was widely expected to lift rates as many as twice in the second half of this year.

In contrast, the Bank of Korea (BOK), South Korea's central bank, cut its benchmark interest rate by a quarter percentage point to a new record low of 1.25 percent last week. It was the first cut in a year, raising concerns over foreign funds exodus.

Other external uncertainties remained such as a British referendum on Brexit scheduled for next week. If Britain decides to give up its EU membership, foreign investors would reduce their holdings of local stocks and bonds amid mounting risk-averse sentiment in the global financial market. Enditem