Banks Quickly Address 'Dollar Shortage'... But Foreign Currency Emergency Plan Activated

Korea-US Currency Swap Agreement
Dollar Supply Temporarily Eased
Monitoring Foreign Currency Supply Status
Checking Foreign Currency Liquidity

[Asia Economy Reporter Kim Min-young] The Bank of Korea has signed a bilateral currency swap agreement worth $60 billion with the U.S. Federal Reserve (Fed), providing immediate relief to the banking sector's dollar supply.

However, concerns persist as the real economy continues to deteriorate and there is ongoing worry that dollars could dry up at any time. Accordingly, commercial banks have launched contingency plans to urgently inspect and manage foreign currency liquidity.

According to the financial sector on the 20th, Shinhan Bank recently strengthened daily monitoring of foreign currency assets and liabilities. If large asset fluctuations are expected, prior consultations among relevant departments are required.

Kookmin Bank is checking foreign capital trends under the leadership of its Capital Markets Group and is closely examining past unusual indicators. Woori Bank also holds daily foreign currency indicator review meetings and receives frequent market situation reports from its overseas branches.

Hana Bank is focusing on increasing the proportion of foreign currency deposits, while NH Nonghyup Bank has formed a foreign currency liquidity emergency task force (TF) to manage liquidity.

Banks have also established committed lines and credit lines that allow them to borrow foreign currency from overseas financial institutions during crises. Under these agreements, domestic banks can borrow foreign currency at agreed limits and exchange rates whenever needed. It is a kind of overdraft account established between financial institutions.

Shinhan Bank has signed a $1.2 billion committed line with Credit Suisse and others, and Woori Bank has secured $800 million.

Kookmin Bank has also set up a committed line adjustable between $500 million and $800 million depending on market conditions. The bank has also signed credit lines worth $7 billion with Citigroup, Standard Chartered Group, and others.

Hana Bank recently secured about $1.2 billion from 3 to 4 overseas financial institutions through additional credit line contracts. A Hana Bank official said, “We are making every effort to secure funds on all fronts.”

On the 20th, as the KOSPI and KOSDAQ indices started higher, dealers were busy working in the KB Kookmin Bank dealing room in Yeouido, Yeongdeungpo-gu, Seoul. The won-dollar exchange rate opened at 1,253.7 won, down 32.0 won. Photo by Moon Honam munonam@

Foreign currency soundness of domestic banks is considered to be relatively good. As of the end of last month, foreign currency deposits of the four major banks totaled $43.9 billion. Also, as of the end of last month, the foreign currency Liquidity Coverage Ratio (LCR) was 128.3%, exceeding the Financial Supervisory Service’s regulatory ratio of 80%. The LCR, an indicator of foreign currency soundness, refers to the ratio of highly liquid foreign currency assets that can be immediately converted to cash against foreign currency outflows over 30 days in a liquidity crisis.

However, the situation is not one to be complacent about. As major global institutions and investors are actively purchasing the “safe-haven asset” dollar, South Korea’s Credit Default Swap (CDS) premium has been on the rise. It fell to a historic low of 20 basis points (bp) (1bp=0.01%) in January but recently jumped to the 50bp range.

A financial sector official said, “Although the currency swap agreement was fortunately signed amid an unprecedented stock market decline, domestic banks, still traumatized by the foreign exchange crisis, are on high alert and closely monitoring market conditions.”

Meanwhile, on the 18th, the government decided to expand banks’ forward foreign exchange position limits to defend the exchange rate and prevent foreign currency fund outflows. With this measure, the forward foreign exchange position limit for domestic banks will increase from 40% to 50%, and for foreign bank branches from 200% to 250%, respectively.

This content was produced with the assistance of AI translation services.