South Korean banks must take active measures, including the sale of their foreign assets, to stem any shortfalls in liquidity, the nation's top economic policymaker said Monday.
"The government plans to help facilitate liquidity flows, but financial institutions need to do their part," Finance Minister Kang Man-soo was quoted as saying by Yonhap News at a meeting with the heads of local banks, adding that it would take considerable time for the global credit crunch to die down.
Kang called on local lenders to sell off overseas assets and stock holdings to secure liquidity and to transfer foreign currency deposits held in overseas banks back into the country to increase domestic foreign currency reserves.
South Korea's currency market has been suffering from a dollar shortage, as banks and companies are rushing to the safer greenback on concerns over a financial crisis sparked by the collapse of investment bank Lehman Brothers Holdings.
The Finance Ministry recently announced that it will inject a total of $10 billion into the nation's won-dollar swap market to provide liquidity amid tightening credit conditions. The government said Thursday it will also supply $5 billion in foreign currency to small- and medium-sized exporters starting this week through financial trade deals.
Despite the government's pledge, the Korean currency was trading at 1,247.70 won as of 9:31 a.m., down 24.20 won from the previous session amid persistent jitters in the U.S. financial market.
According to South Korea's central bank, the country's foreign exchange reserves reached $239.7 billion as of the end of September, down $3.53 billion from a month earlier, marking a decline for the sixth straight month. A fall in foreign reserves came mainly as foreign exchange authorities unloaded part of their dollar holdings to prop up the weakening local currency in a move to fight inflation.
Meanwhile, South Korea's top financial regulator urged local banks to refrain from withdrawing their loans from smaller companies facing liquidity problems amid a slowing economy.
"When smaller companies with growth potential have trouble in facing temporary liquidity, banks need to support them," Jun Kwang-woo, chairman of the Financial Services Commission (FSC), was quoted as saying.
Jun's remarks came as South Korean small and medium enterprises (SMEs) have been hit by sluggish domestic demand, higher raw material costs and a volatile foreign exchange rate.
The financial watchdog said last week that the government will extend liquidity of about 4.3 trillion won ($3.52 billion) to smaller firms suffering from cash shortages and losses related to currency option contracts.