Korean banks to be required park cash reserves for bank bonds

Korean banks will be required to put aside cash reserves for won-denominated bonds that come due in less than two years.

Currently,  are required to set aside a certain amount of customer deposits in cash at the central bank. The finance ministry said in a statement that foreign currency-denominated bonds will be excluded mainly because South Korea has been imposing levy on banks' non-deposit foreign currency borrowings since August.

South Korea's National Assembly passed a law aimed at beefing up the role of the Bank of Korea in coping with financial instability, setting the stage for the central bank to play a role in preventing future financial crisis situations. The finance ministry said that the government, the BOK and the financial watchdog have drawn up detailed measures to enforce the law effective Dec. 27. The new changes allow the BOK to keep financial stability as its policy priority, together with price stability, and empower the central bank to carry out policies to stem systemic financial risks.

The new rules have triggered opposition from banks, which argue that it will likely hurt their profitability. But the central bank claimed that excessive sale of bank bonds are blamed for bringing about a funding squeeze when the global financial crisis cropped up in 2008.

The new law also legally guarantees the BOK's right to request the Financial Supervisory Service, the country's financial watchdog, to jointly inspect financial firms.

According to the enforcement ordinance, the FSS is required to launch a probe within one month of receiving a formal request from the BOK. The central bank can demand the FSS share data on non-bank institutions like savings banks and securities firms.

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