S. Korea’s Financial Market more Health and Soundness

The volatility of domestic financial market has been unstable since this August due to uneasiness around European sovereign debt crisis and its possible contagion to Italy and heightened uncertainty related to the raising of the US government debt ceiling.

However favorable financial soundness and foreign exchange reserve suggest that such impact on Korea’s economy will be limited. Compared with Asian financial crisis in 1997 and global financial crisis in 2008, our ability to manage risks has been improved than ever usual.

Since the global financial crisis in 2008, Financial Services Commission (FSC) and Financial Supervisory Service (FSS) have made various efforts to enhance the soundness in foreign and bank sector.

The government strengthened regulations of foreign exchange soundness in January, 2010 (1st), and in July, 2010 (2nd). FSC made new standards for FX liquidity risk management and tightened regulations to increase mid- to long- term financing in foreign loan portfolios. In addition, the financial institutions are required to meet minimum holdings of safe FX assets requirement.

The government introduced (’10 Oct) and strengthened (’11 Jul) the regulation of forward exchange position. On July, 2011, the ceiling on the FX forward position by local branches of foreign banks was cut to 200 percent of their capital, while the ceiling for domestic banks to 40 percent.

Also financial regulators have adopted so-called ‘Bank Tax’ in August, 2011. The government began imposing a bank levy of 0.2 percent on short-term non-deposit liabilities with a maturity of less than one year. Borrowing with a maturity of one to three years is facing a 0.2 percent tax rate, while the rate for liabilities that mature in three to five years and more than five years is 0.05 percent and 0.02 percent. A bank levy is regarded as a tool to protect a nation’s financial system from excessive capital flows by imposing taxes on debts held by banks.

In order to restrain foreign loans from growing rapidly, the government banned banks and other financial institutions from investing in foreign-currency denominated bonds (‘Kimchi Bonds’) that are used for conversion into local currency. Kimchi bonds are supposed to help companies finance demand for foreign currency such as in contract settlements, an increasing number of firms haven abusing the bonds and using the proceeds to meet local currency needs, raising concerns over exchange-rate risks. This restriction is to help curb foreign currency loans growth which is not essential and urgent.

In addition the government reformed the regulation on bank’s loan to deposit ratio. The planned changes in the regulation are applied to commercial banks in principle having won-denominated loans in excess of KRW 2.0 trillion. The target for banks’ loan to deposit ratio is to be set at 100 percent with a grace period until June, 2012 whereupon banks will be required to maintain a ratio of under 100 percent from July, 2012.

With these governmental actions, our ability to manage risks and soundness in foreign and bank sector have been improved than just before the global financial crisis in 2008.

In foreign sector, total foreign debt to short-term foreign debt ratio has been significantly decreased from 52 percent in September, 2008 to 38 percent in March, 2011.

(Unit: $100 million)

 

2007.12

2008.09 (A)

2011.03 (B)

Variation (B-A)

          Total foreign debt (a)

3,334

3,651

3,819

168

Short-term foreign debt (b)

1,603

1,896

1,467

429

Short-term foreign debt ratio (b/a)

48.1%

51.9%

38.4%

13.5%

Foreign Exchange Reserve

2,622

2,397

2,986

589

Short-term foreign debt/Foreign Exchange reserve

61.1%

79.1%

49.1%

30.0%

Foreign debt in bank sector

1,929

2,195

1,919

276

Domestic banks

1,090

1,221

1,155

66

Short-term debt

546

655

485

170

(Ratio)

(50.1%)

(53.6%)

(42.0%)

(11.6%)

Local branches of foreign banks

839

974

764

210

Short-term debt

794

939

666

273

(Ratio)

(94.5%)

(96.4%)

(87.2%)

(9.2%)

(Data from FSC)

In bank sector, within the loan to deposit ratio, banks have sustained under 100 percent which is the standard regulation. Moreover, BIS ratio has been significantly improved. Within the foreign currency liquidity ratio, it has been in excess of 85 percent which is the guidance.

 

Before the ’08 crisis (2008.08)

2011.06

Variation

Loan to deposit ratio (except for CD)

124.0%

97.8%

26.2%

BIS ratio

11.36%1)

14.34%2)

+2.98%

Tangible common equity ratio

8.50%1)

11.28%2)

+2.78%

Foreign currency liquidity ratio

102.7%3)

100.3%

2.4%

1)       ’08.6,        2) ’11.3,      3)’07.12

 (Data from FSC)

It is considered that current shaky sentiment of South Korea’s financial market came more from significant downside risks to the economic outlook and sovereign risks of other financial markets such as US and Europe than domestic factors. Moreover, domestic financial market has become more resistant to external shocks in various indicators. It reflects efforts made to enhance soundness of the financial market.

Yong-Heui Lee (leeyongheui@gmail.com)

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About Yong-Heui Lee
Hi, there

One Response to S. Korea’s Financial Market more Health and Soundness

  1. Health says:

    I’m enligtened about something new every time I come here.

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