Financial Supervisory Service Checks Foreign Currency Liquidity of Domestic Banks... "Caution Needed for Prolonged Strength of the Dollar"

Holding a Meeting to Review Foreign Currency Liquidity Status of Domestic Banks

[Asia Economy Reporter Song Hwajeong] The Financial Supervisory Service (FSS) recently ordered domestic banks to check their foreign currency liquidity situation amid increased volatility in the financial market due to the recent rise in exchange rates, and to establish a stable structure for foreign currency procurement and operation, as well as to discover new means to secure foreign currency liquidity in emergencies.

On the 6th, the FSS announced that it held a foreign currency liquidity status review meeting chaired by the deputy director in charge of banks, with participation from domestic banks and foreign bank branches. At the meeting, they discussed foreigners’ evaluations and outlooks on the Korean market, the foreign currency liquidity situation, and response plans.

The participants agreed that the recent depreciation of the Korean won was due to the strength of the US dollar, similar to the decline in major advanced country currencies such as the euro and yen, and emphasized the need to prepare for the possibility of a prolonged US dollar strength. Foreign banks highlighted that despite the recent rise in exchange rates, dollar liquidity in the domestic swap market remains sound, which differs from past crises.

In August, the foreign currency Liquidity Coverage Ratio (LCR) of domestic banks stood at 124.2%, exceeding the regulatory ratio (80% or above) by more than 40 percentage points, indicating a favorable situation. Domestic banks have proactively expanded medium- to long-term foreign currency funding since the beginning of this year in preparation for increased financial market uncertainty, and are actively responding to foreign currency demand in the real sector, such as increased trade finance and foreign currency loans.

Deputy Director Kim Youngju of the FSS ordered more conservative foreign currency liquidity management. Deputy Director Kim said, "Since it seems difficult for domestic and international instability factors to be resolved in the short term, it is necessary to establish and manage a stable structure for foreign currency procurement and operation from a long-term perspective so that foreign currency liquidity can be responded to at any time in crisis situations." He added, "New means to secure foreign currency liquidity in emergencies, such as foreign currency securities lending transactions with insurance companies currently being pursued by some banks, should be actively discovered." Furthermore, Deputy Director Kim emphasized, "Committed lines and other channels that can quickly procure foreign currency funds in times of crisis should be proactively secured according to each bank’s circumstances."

The FSS plans to strengthen foreign currency liquidity management by guiding domestic banks to secure sufficient foreign currency funds to support export and import companies. An FSS official stated, "We will closely monitor the foreign currency liquidity situation of domestic financial companies to further strengthen their ability to respond to domestic and international risks, actively respond to financial market conditions by timely grasping on-site information through hotlines with domestic banks and foreign bank branches, and enhance cooperation with related agencies to provide necessary support to the financial market."

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