By Kang Seung-woo
Foreign capital liquidity is in the news as Financial Services Commission (FSC) Chairman Kim Seok-dong continues to take precautions.
In fear of ongoing uncertainties in advanced economies, he is requiring banks to brace for any fallout abroad in order to shield the nation’s economy that has often seen foreign investors scrambling for the exit during Korean financial woes.
Observers on the contrary say that there are fewer chances that the current situation will evolve into a full-blown crisis.
“We have to closely monitor local banks’ foreign capital liquidity situations,” Kim said to an executive council on Monday.
He also told 12 lenders, which recently joined the FSC’s task force for foreign currency liquidity, to submit their plans on how to find stable overseas borrowing channels, when financial turmoil occurs.
He has remarked on foreign capital liquidity three times in five days.
On Saturday Kim said, “The foreign exchange soundness will be the top priority of the nation’s financial policies this year.”
Again on Thursday he said to reporters that it is really important for financial institutions to secure foreign exchange soundness and liquidity and the government is watching and preparing to deal with the issue.
The FSC said that Kim’s focus stems from history and that Asia’s fourth-largest economy has periodically suffered liquidity problems in foreign capital.
Korea went through the 1997-98 Asian financial crisis and the global financial fiasco in 2008, triggered by an exodus of foreign capital, which sent the country’s financial system into chaos.
In addition, lingering uncertainties in the eurozone and United States are posing threats to Korea’s foreign currency sector.
“Concerns are growing over threatened debt defaults in the United States and Europe,” an FSC official said.
“The precautionary efforts to brace for any financial crisis will prevent the Korean economy from failing.”
Observers say that Europe’s sovereign-debt crisis is the main challenge to Korea.
“Local lenders’ loans from European banks stood at $65.1 billion, accounting for one third of the overall foreign currency borrowing, but increases to comprise nearly half of it, if offshore borrowing is included,” said Lee Chang-seon, managing director of the financial research department at LG Economic Research Institute.
“If Europe’s debt turmoil spreads to other countries, European lenders will try to take back the money, mainly in dollars and euros.”
As for the U.S. debt ceiling impasse, he said there is still time to strike a deal by the deadline of Aug. 2.
However, Lee said that the liquidity crisis is far from taking place here.
“The European problem, along with the threat of a U.S. sovereign-debt default, is not likely to end up in a liquidity crisis,” he said.
“Once they occur, financial risks will be tough to manage. That is why Chairman Kim is pushing banks to raise foreign currency funds.”
The country’s foreign reserves stood at $304.48 billion as of the end of June, according to the Bank of Korea (BOK) and it was the world's seventh-largest holder of foreign exchange reserves after China, Japan, Russia, Taiwan, Brazil and India, as of the end of May.