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Foreign Banks Under Fire in South Korea

Song Jung-a in Seoul
Friday, 29 Oct 2010 | 12:03 AM ET

Hundreds of South Korea’s small and midsized exporters have threatened to boycott a number of significant foreign-owned banks after they suffered heavy losses from currency derivative investments.

The exporters held a rally in front of Citibank’s Korean headquarters in Seoul on Thursday, demanding the U.S. bank pull out of the country. The group of 242 companies accused a number of foreign banks for failing to fully brief them of the potential risks of “knock-in, knockout” currency contracts, or kikos.

“These foreign ransackers should be ousted from Korea?...?We will implement a nationwide campaign to suspend transactions with overseas banks, beginning with Citibank Korea,” the Association of Kiko Victims said.

Kiko contracts allow holders to sell dollars at a fixed exchange rate if the Korean won moves within a certain range set out in the contract, but they are obliged to sell dollars below the market rate if the exchange rate moves outside that range.

More than 700 Korean companies signed kiko contracts to hedge currency risks as they expected the local currency to appreciate against the dollar. The government estimates that they have chalked up 3,200 billion won ($2.8 billion) in losses on the instruments as the Korean won lost about 30 percent against the dollar in 2008 amid the global financial crisis.

The Association of Kiko Victims claims that nearly 80 percent of their losses were incurred through foreign banks. It is considering filing a lawsuit in the U.S. against overseas banks such as JPMorgan and Goldman Sachs for kiko damages.

Citi has denied any wrongdoing. “In any transaction, Citi performs a suitability test and discloses the relevant risks. We believe we have always been transparent about the product’s potential risks to all clients who invested in [foreign exchange] options, including Kikos,” Citi told the FT on Thursday.

The Korea Federation of Banks recently said that they had fully explained kikos’ potential risks to their customers and the contracts were voluntarily made by companies. South Korean companies have filed more than 200 lawsuits against 13 banks, including Standard Chartered , Citibank and HSBC , seeking to nullify the kiko contracts. They also urged criminal proceedings against them earlier this year.

Thursday’s rally and the mounting lawsuits reflect the continuing anger in Asia against banks that sold complex financial products to non-professional investors in the build-up to the 2008 credit crisis. In Hong Kong, retail investors who lost money from credit derivatives linked to Lehman Brothers bonds have held daily protests outside banks’ offices for the past two years.

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