Korean banks and currency dealers are keeping close tabs on whether the parliament will approve a bill to introduce a bank levy that could cut the inflow of dollars, market sources said Tuesday.
In a bid to stem excessive foreign capital flows, the government is seeking to introduce a bank levy that will be imposed on non-core foreign currency borrowing in the second half. The National Assembly, now holding an extra session, is slated to vote on a related bill on March 7.
According to the sources, market players are paying keen attention to how much the government will impose on banks’ borrowing as the rate will be differently levied on the maturity of foreign debt with short-term borrowing subject to higher rates.
The government is considering imposing a levy of around 0.2 percent on short-term liabilities and 0.1 percent on debt with one to three-year maturity. Long-term borrowing with a maturity of over five years may face a 0.05 percent tax rate.
Market experts said as the foreign exchange markets have already priced in the issue of the bank levy, the move is not likely to have a major impact on the local currency.
“The local currency is not likely to be affected by the move itself as the levy is already factored in the market,” said Byeon Ji-young, a currency analyst at Woori Futures Co.
“The issue is also expected to have limited impacts on the bond market, but it remains to be seen over how much foreigners would curtail their investment in local bonds when the move takes effect.”
But some argue that if the government imposes higher-than-expected rates on overseas borrowing, the move is likely to add downward pressure on the local currency.
The government estimated that the introduction of a bank levy is expected to prompt the banking sector to shoulder an additional burden of as much as 250 billion won ($221.7 million).
As of end June last year, foreign debt accounted for 15.3 percent of Korean banks’ total borrowing, but local branches of foreign banks saw their foreign borrowing reach 54.9 percent out of their total debt.
Banks’ excessive short-term borrowing has been blamed for the cause of the global financial turmoil. Banks tend to rush to repay debt to curtail risks when a financial crisis takes place after bloating their assets during favorable times, backed by heavy borrowing from overseas.