Korean banks stock up on foreign currency

By Kim Jae-won

Korean banks have increased their holdings of foreign currencies in anticipation of side effects from Standard & Poor’s (S&P) recent sovereign credit downgrades on European countries, the financial watchdog said Monday.

According to the Financial Supervisory Service (FSS), 16 Korean banks borrowed 20 percent more than what was needed to roll over their maturing short-term foreign debts last month, putting their debt-refinancing at over 120 percent.

Last November, borrowing accounted for 95.9 percent.

Citibank Korea and Standard Chartered Bank in Korea were excluded from the survey.

“Korean banks expanded their foreign borrowing as part of preemptive efforts to brace for the worsening of external circumstances,” the FSS said in its report.

The rollover rate of short-term foreign debt is a key indicator showing a bank’s soundness against a foreign currency liquidity crunch.

Korean banks suffered from foreign currency liquidity crunches in the Asian financial crisis in the late 1990s and the global financial crisis in 2008.

The refinancing rate of 12 Korean banks’ mid- and long-term foreign debts stood at 174.4 percent, slipping from 179 percent a month ago, the FSS said. Four provincial banks were excluded from the list of 16.

The December figure, however, marked the seventh straight month that the lenders have acquired fresh foreign debt.

The FSS did not disclose the data by lender because the information is confidential but said most of the banks showed a solid increase in their refinancing rates.

The rollover rate gauges the ratio of fresh borrowing to debt that matures in one year or less.

S&P cut the credit ratings of nine eurozone countries including France, Friday, citing their lackluster efforts to fight the spreading potential for a financial crisis.

S&P said that South Korea was more sustainable against North Korean factors.

The spread on credit default swaps (CDSs) for Korea’s dollar-denominated currency stabilization bonds reached 161 basis points in December after hitting 169 basis points, following the death of North Korean leader Kim Jong-il.

A basis point is 0.01 percent.

The watchdog said although the figure gained 11 basis points from the previous month, the increase was relatively small compared with other major Asian and European countries.

The FSS said it plans to encourage domestic banks to secure greater foreign currency liquidity and diversify funding sources as the eurozone debt crisis may persist.