Watchdog to stiffen rules on banks` foreign currency liquidity

SEOUL, Sept. 25 (Yonhap) -- South Korea's financial watchdog plans to require
local financial firms to improve the soundness of their foreign currency
liquidity conditions in an effort to prevent a possible liquidity crunch, its
head said Friday.
Korean banks, saddled with high short-term borrowing, suffered from a severe
liquidity squeeze last year, hit by the U.S.-sparked global financial crisis,
sparking concerns they may face difficulty in servicing their debt.
"A severe global credit crunch revealed the weakness of Korean financial firms
over foreign currency liquidity. There is the need to toughen supervisory tools
as problems related to such liquidity could spark systemic risks," Chin Dong-soo,
chairman of the Financial Services Commission (FSC), told a press conference.
As one of the envisioned toughened rules, to curb banks' heavy dependence on
short-term overseas borrowing, the watchdog plans to make them increase the
proportion of mid-and long-term borrowing to finance their loans with maturity of
more than one year.
Currently, the ratio of mid-and long-term foreign borrowing to such loans stands
at 80 percent. The watchdog said it will encourage banks to raise the ratio to
110 percent this year and to 120 percent next year.
The FSC will also call for local financial institutions to beef up their risk
management for foreign currency liquidity and plans to introduce some limits on
the ratio of foreign currency assets to their equity capital.
It plans to finalize details in October and implement such rules next year, it
added.
As of the end of June, short-term foreign debt held by local banks stood at
US$106.2 billion, up $2.42 billion from three months earlier.
The ratio of lenders' overseas debt with maturity of less than one year to the
country's total foreign debt reached 27.9 percent as of end-June, down 0.2
percentage point from the previous quarter, according to data by the Bank of
Korea.
sooyeon@yna.co.kr
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