The Bank of Korea said Thursday that local banks will have their first chance to utilize a currency swap deal with the U.S. Federal Reserve aimed at alleviating a dollar shortage caused by the global credit crunch, AP reported.
The central bank said in a statement that it will hold a competitive auction on Dec. 2 by offering $4 billion in loans. South Korean banks as well as the local branches of foreign banks can participate.
"The BOK expects the introduction of this facility to enlarge the U.S. dollar funding opportunities for the banks and contribute to improving foreign currency funding conditions and relieving market concerns," the bank said in a statement.
South Korean banks and companies have been scrambling to acquire dollars to meet foreign debt obligations as formerly easily obtained short-term rollover loans have become harder to obtain amid the worldwide credit seizure.
The Bank of Korea and the Fed announced the currency swap deal in late October, allowing South Korea to get access to up to $30 billion until April 30, 2009.
The Fed also reached similar agreements with the central banks of Brazil, Mexico and Singapore in a bid to help ease dollar shortages.
The central bank said the loans under the currency swap facility will be made through competitive auctions and have a maximum duration of 88 days. Interest rates will be determined before each auction.
The banks are required to provide the BOK with South Korean won collateral amounting to 110 percent of the won value of the dollar loan, the central bank said.
South Korea has consistently said that its foreign currency reserves are sufficient to see it through the financial crisis. Those reserves, the world's sixth-largest, have been declining, however, as authorities have dipped into the pool of cash.
The reserves, which totaled $212.25 billion at the end of October, declined by $27.4 billion, the biggest ever for a single month, as the central bank expanded dollar liquidity to the financial system to help calm the effects of the credit crunch.
The South Korean won has fallen about 37 percent so far this year as foreign investors have sold South Korean stocks at a record pace and repatriated their money. The decline in the currency means more won is needed when exchanging for dollars.
The currency swap deal is one of a number of measures the government has carried out in the face of the crisis. It announced last month a $100 billion plan to guarantee new overseas loans taken out by the country's banks.