central bank-bond custody service

SEOUL, March 21 (Yonhap) -- South Korea's central bank said Thursday that it plans to provide custody services to global central banks when they invest in local state bonds in a bid to better monitor cross-border capital inflows.

The Bank of Korea (BOK) said it plans to serve as a custodian bank when other central banks buy and sell designated bonds.

Central banks, international organizations and other governments will be eligible to receive such services when they invest in government bonds and monetary stabilization bonds, according to the BOK.

Custody services include keeping securities and collecting interest and dividends. The BOK said it is aiming to launch the service by the end of this year.

"The move will help Korea promote financial stability as monitoring of foreign capital flows could be strengthened," the BOK said in a report on payment and settlement.

The move came as some central banks around the globe have been aggressively buying higher-yielding Korean bonds.

A series of credit rating upgrades prompted foreign investors to purchase Korean assets as they are largely viewed as relatively safe amid the eurozone debt crisis.

Aggressive monetary easing by advanced economies is making cheap money flow into emerging countries, increasing volatility of cross-border capital movements.

Total holdings of local bonds by foreign central banks are estimated at 28.8 trillion won (US$25.8 billion) as of end-2012, up from 3.3 trillion won at the end of 2008.

The BOK said its custody services will allow central bank clients to see reduced risks related to securities depositaries, compared with commercial custodian banks. The BOK also said it plans to levy a low commission in return for its services though an exact rate has not been decided upon.

Currently, central banks mostly use local branches of foreign banks as their custodian banks, which makes it difficult for Korea to exactly keep track of which banks have bought Seoul bonds.

"The BOK's move would not necessarily spur higher demand for Korean bonds as foreign central banks already bought a bulk of local bonds, and they would slowly switch their custodian banks," said an official at the BOK.

Major central banks, including the Federal Reserve and the Bank of England, are providing similar custody services to their counterparts, according to the BOK.

Whenever a financial crisis has cropped up, South Korea has undergone excessive cross-border capital exchanges as foreign investors have pulled their money from Korea en masse.

Since 2010, Korea has built up financial safety nets to cushion negative spillover impacts from massive foreign capital inflows.

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