S. Korea to probe more banks over currency forwards, 'kimchi bonds'

SEOUL, May 3 (Yonhap) -- South Korea's financial authorities said Tuesday that they plan to extend the inspection of local banks' trading of currency forwards amid a sharp increase in short-term overseas debt.
The Bank of Korea (BOK) and the Financial Supervisory Service (FSS) are conducting a joint inspection of two domestic banks and as many local branches of foreign lenders over currency forwards, which will run until Friday.
They said in a joint statement that they will probe more than two additional banks as early as in mid-May as the sale of "kimchi bonds" has been on the sharp rise, increasing market instability. But the specific number of banks and the timing have yet to be decided, they added.
"Targets of banks will be selected by taking into account the track records of non-deliverable forwards trade and the size of handling such bonds," said an official at the BOK.
"Kimchi bonds" refer to foreign-currency debt issued by local and foreign companies in South Korea. Excessive sales of kimchi bonds have been blamed as the main reason for rising short-term foreign debt, putting upward pressure on the local currency.
Companies typically issue kimchi bonds to raise dollars to settle transactions with foreign partners, and the proceeds of the debt sales are restricted to foreign-currency transactions.
But some local firms sold kimchi bonds to swap the dollar into the won through local branches of foreign banks, given that the sale of foreign-currency bonds is cheaper than that of won-denominated ones.
sooyeon@yna.co.kr