2010-06-23 16:57

SEOUL - South Korea will ban local financial institutions from extending foreign currency loans to be used for domestic use as part of its policies to ease capital volatility, the central bank said Wednesday.

According to the Bank of Korea (BOK), the new rule will take effect from July 1, which will be applied to 55 lenders, including foreign bank branches here, and other financial institutions.

The move came as the central bank and the government in mid- June announced to take actions to prevent excessive cross-border capital flows and reduce short-term foreign debt.

"Despite a decrease in foreign currency loans for the use of local facility funds, it is highly likely that a demand for foreign currency loans will rise on the back of a stronger won and the gap between local and overseas interest rates," Lee Soon-ho, official at the BOK, told South Korea's Yonhap News Agency, explaining the reason for the policy.

For the first four months of 2010, South Korea's foreign currency loans gained $2.19 billion to $44.53 billion mainly because local branches of foreign banks recorded a rise of $2.49 billion in foreign currency lending.