Howdy folks! Today I want to introduce Korean government’s grand plan to increase foreign currency savings. I believe everyone heard about the current financial crisis, right? During the crisis, many banks facing a lack of money went bankrupt. The aftermath of the crisis tells that private financial sectors need to improve their own capabilities to handle their problems amid the crisis. For Korean banks, the shortage of foreign currency savings is one of the crucial problems. The foreign currency savings amount only 3% of the overall savings. And most of those foreign savings are held by corporations for the purpose of foreign transactions, implying the volatility in foreign savings.
Why is it a problem?
Suppose that Korean banks have plenty amount of foreign savings. Then, there is no need for foreign loans. Foreign loans incur high costs, and even higher costs during the crisis. How expensive they are would be beyond our imaginations! But what if Korea banks hold sufficient foreign currencies in USD, EUR, JPY and others? These foreign currencies can build a large amount of savings
What government prepared.
Now I think you understood the importance of foreign currency savings in Korea. So let me explain what government prepared for. In late June, the government, with a long-term perspective, released a three-phase plan to increase the amount of foreign currency savings.
To explain the picture above, each phase, based on the development of the domestic financial market, will provide different kinds of incentives and direction to motivate banks to raise foreign currency savings.
During the first phase, the government expects to gather money from non-residents, such as Koreans with foreign nationality or those staying overseas for different purposes, to save in local banks. Also, exemplary banks supported with incentives and policies will be revised to prepare for the second phase.
In the second phase, the government will discourage the foreign loans and try to increase prudence related to foreign currency savings, while maintaining the incentives provided in the first phase. In this phase, the macroprudential stability levy* is to increase.
* A tax on banks’ non-deposit foreign borrowing introduced in September 2011, which imposes different rate from 2 to 20 basis points based on different contract periods.
In the third phase, when foreign currency savings exceed more than 10% of total amount of savings, the government expects not only quantitative, but also qualitative improvement of foreign currency savings.
I want to say that it is not an easy goal to achieve. However, in a long-run, this three-phase plan will help to ease the current volatility in foreign savings. Anyway, the government is now working hard to make this detailed plan contribute to raise foreign currency savings, so let’s keep our eyes on this issue.
Have a good day:)