Banking groups urged to boost FX liquidity

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SEOUL, Aug. 16 (Yonhap) -- South Korea's top financial regulator urged major banking groups Tuesday to beef up their management of foreign exchange liquidity amid worries the ongoing financial turmoil would dent the country's economic health.
"Banks should not repeat their practice of depending on the government and the central bank when they face difficulties in foreign exchange procurement," Financial Services Commission (FSC) Chairman Kim Seok-dong said in a meeting with the heads of the country's top five banking groups.
"It is necessary to take proactive measures by diversifying sources of foreign exchange, which currently focus excessively on Europe and the United States," Kim said.
Kim's remarks come amid worries the ongoing financial storm, sparked by the first-ever U.S. credit rating downgrade and the eurozone's debt risks, may have a bigger-than-expected impact on the local economy.
"It is difficult to forecast how long it will take for the real economy to recover. We cannot rule out the possibility of the situation having an unexpected impact on the local economy," the top regulator said.
Kim has warned continuously against local banks' foreign currency liquidity conditions, saying that a severe shortage could shake the economy.
In response, local banks have been stepping up efforts to beef up foreign exchange liquidity conditions.
Woori Finance Holdings Co. Chairman Lee Pal-seung told reporters ahead of the meeting that the top banking group is seeking to secure a US$2 billion foreign exchange credit committed line by the end of the year.
The country's top lender Kookmin Bank has announced it is preparing to sign a committed line contract with an overseas lender and Shinhan Bank, the flagship of No. 3 banking group Shinhan Financial Group Co., has built a $1 billion committed line.
South Korea learned its lesson on the importance of beefing up banks' foreign currency liquidity after experiencing the 1997-98 Asia-wide financial crisis and the more recent global financial turmoil. At the height of the global financial storm, Korean banks, saddled with heavy short-term debt, had difficulty refinancing foreign currency loans or securing FX liquidity as foreign capital fled the country en masse.
In a bid to brace for problems stemming from foreign exchange, the FSC last month requested 12 local banks to submit their detailed plans on how to fund foreign currency liquidity in case of financial turmoil.
South Korea has also announced plans to conduct daily checks on local banks' foreign currency levels to stave off a liquidity crunch amid rising market volatility.
Local banks' overall foreign currency conditions are deemed sound, but unexpected external shocks are feared to plunge the country into a foreign currency liquidity squeeze.
The country's foreign reserves reached a fresh high of $311.03 billion as of the end of July, up $6.55 billion from June.
Meanwhile, Financial Supervisory Service (FSS) Gov. Kwon Hyouk-se told the meeting that local banks should beef up their companies' equity capital rather than dole out hefty dividends in order to better cope with a financial crisis and meet a tougher international capital rule.
Under the so-called Basel III standard that will take effect in 2013, local financial holding companies will be required to keep their capital adequacy ratio, or the percentage of capital to risk-weighted assets, at 10.5 percent or above.
mil@yna.co.kr