FOREIGN EXCHANGE | Staff Reporter, Korea

3 keys to Korean banks' resilience against foreign currency liquidity risks

Among the ways is terming out debt maturities and it finally paid off.

Moody's believes that Korean banks are now more resilient against foreign currency liquidity stress than they were during the 2008-09 global financial crisis.

Here's more from Moody's:

Since 2009, the banks have taken numerous measures to improve their foreign currency funding and liquidity profiles, mainly through: (1) terming out debt maturities, (2) diversifying their sources of debt, and (3) increasing their liquidity buffers.

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

We expect the authorities to continue regulating and monitoring the banks, given the risks to the sector from the euro area financial crisis, as well as the slower global economic outlook.

Terming out debt maturities: Korean banks have improved their debt maturity profiles by refinancing short-term debt with long-term debt. Among the seven largest banks in terms of foreign currency assets, the ratio of their short-term foreign currency debt to total foreign currency debt improved to 51% at the end of June, from 56% at end-2011. This was despite total foreign currency assets increasing by 11.9% on an annualized basis in 1H 2012.

Diversifying sources of debt: Korean banks have diversified their debt structures2 in terms of currency and investor base, to avoid overly relying on investors in the United States, and Europe.

Consequently, the proportion of their foreign currency debt in currencies other than US dollars, euro and yen increased to 15.6% at 1H 2012 from 11.2% at end-2009. By contrast, their total euro debt fell to 5.5% from 11.2% over the same period.

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