Government to Strengthen Monitoring of Insurers’ Foreign Bond Investment

The Ministry of Economy and Finance will announce measures within this month for a closer monitoring of overseas investment by non-bank financial institutions.

The Ministry of Economy and Finance is planning to announce foreign exchange risk management measures within this month for a closer monitoring of overseas investment by non-bank financial institutions such as insurance companies.

Since the global financial crisis of 2008, the South Korean government has monitored financial institutions’ borrowings from abroad with the three tools of foreign exchange soundness levies, forward exchange position regulations and taxation on bond investment by foreigners.

Financial companies investing in foreign bonds borrow the U.S. dollar by providing the won as collateral. In March last year, when the entire financial market was hit extremely hard by COVID-19, the three-month won-dollar swap rate dropped to negative 3 percent a year. A negative swap rate means that interest payment is required in the borrowing process. Back in 2019, the rate was negative 0.92 percent or so. However, the pandemic led to a rapid increase in U.S. dollar procurement cost.

In 2019, South Korean insurance companies’ investments in foreign marketable securities (bonds) added up to 107,467.6 billion won. The amount, which had been slightly over 77 trillion won in 2016, increased approximately 10 trillion won each year. At present, insurance companies account for most of the foreign bond investment by domestic financial institutions.