Korean Banks Resilient to Foreign Currency Liquidity Risks

Moody’s says that Korean banks are now more resilient against foreign currency liquidity stress than they were during the global financial crisis in 2008-2009.

“The Korean banking system remains vulnerable to foreign currency funding risks because the banks still have a structural reliance on wholesale funding, but they have also made clear improvements that mitigate the risk,” said Youngil Choi, a Moody’s vice president and senior credit officer.

Choi was speaking on the release of a report titled ‘Korean Banks: More
Resilient to Foreign Currency Liquidity Risks’. The report discusses the key measures that Korean banks have taken since 2009 to improve their foreign currency funding and liquidity profiles, including:

  • Terming out their debt maturities.
  • Diversifying their sources of debt.
  • Increasing the size of their liquidity buffers.

“The main drivers of the improvements in liquidity have been tighter regulations, increased government oversight and better market conditions, which have given Korean banks ready access to term financing in multiple currencies,” added Choi.

The Moody’s report notes that Korean banks have improved their debt maturity profiles as they have been able to refinance short-term debt with long-term debt. For example, Moody’s survey of the seven largest banks shows that the ratio of their short-term foreign currency debt to total foreign currency debt improved to 51% at end-June 2012 from 56% at end-2011.

These banks have also diversified their foreign currency debt structures in terms of currency. The proportion of their foreign currency debt in currencies other than US dollar (USD), euro and yen increased to 15.6% in H112 from 11.2% at end-2009. By contrast, their euro-denominated debt fell to 5.5% from 11.2% over the same period.

Korean banks have further boosted their liquidity buffers – including foreign currency cash and deposit assets – to mitigate against possible refinancing risks related to any potential disruption in the international capital markets.

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