[Exclusive] Woori Bank to Temporarily Halt OTC Derivatives Sales... "High Risk Due to Rapid Interest Rate and Exchange Rate Fluctuations"

Woori Bank "Responding to Market Volatility as Part of Risk Management"

[Asia Economy Reporter Song Seung-seop] Woori Bank has decided not to sell over-the-counter (OTC) derivatives products for the time being. This is to ensure thorough risk management amid soaring interest rates and exchange rates.

According to the financial sector on the 14th, Woori Bank made the decision to ‘restrict customer transactions of OTC derivatives products’ on the 5th. OTC derivatives products are instruments created from underlying assets. They are traded through one-on-one contracts without an exchange. This measure will continue until further notice. The targeted products include long- and short-term forward exchange contracts, currency swaps, interest rate swaps, currency options, and institution-targeted derivatives products. However, interest rate swaps for which customer consultations were completed before the implementation date will be excluded from the restriction.

Woori Bank restricted the handling of OTC derivatives products due to the rapid rise in interest rates. The Bank of Korea raised the base rate by 0.50 percentage points on the 12th, bringing the base rate into the 3% range for the first time in 10 years. When the market interest rate begins to rise following the base rate, OTC derivatives transactions increase in the market. This is to hedge against losses caused by interest rate fluctuations. However, as the investment scale grows, the associated risks also increase. Since the transaction amount of OTC derivatives by domestic financial companies reached a record high of 1,814.6 trillion won last year, a proactive speed adjustment strategy is necessary.

The rise in the exchange rate is also a factor. According to the Bank of Korea, the average won-dollar exchange rate rose from 1,318.44 won in August to 1,391.59 won in September. On October 13, the won-dollar exchange rate closed at 1,431.3 won. While derivatives products that benefit from rising exchange rates gain popularity, banks cannot overlook soundness considerations. Failure to respond to increased market volatility could lead to losses. A financial sector official explained, “It is hard to imagine the exchange rate dropping sharply now, but market conditions are unpredictable,” adding, “There were times in the past when the exchange rate rose rapidly but then suddenly stopped, resulting in significant losses.”

However, the impact on the Bank for International Settlements (BIS) ratio is said to be minimal. The BIS ratio is the percentage obtained by dividing a bank’s capital by risk-weighted assets. BIS recommends maintaining this ratio at a minimum of 8%. When the exchange rate rises, the BIS ratio falls because the won-converted value of foreign currency assets increases. A Woori Bank official stated, “The impact on the BIS ratio is very minimal,” and added, “Since interest rate and exchange rate volatility are already very high, this measure was implemented for risk management.”

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