By Kang Seung-woo
The fallout from the global financial turmoil from advanced economies has been roiling the Korean financial markets, with its benchmark stock index plunging sharply of late.
Amid this unabated swoon, major local banks have fallen prey to the volatility as their shares nosedived.
Observers say that Korean lenders’ increasing heavy reliance on wholesale funding, mainly from Europe and the United States, is leaving them vulnerable to financial uncertainties.
Wholesale funding, a source of financing for banks to expand or to satisfy funding needs from big financial institutions, refers to foreign deposits, federal funds and brokered deposits.
The ongoing European debt crisis is likely to weigh more on the local banks, as Morgan Stanley’s recent research on Asia’s credit strategy concluded that Korea will be hit hardest if the sovereign-debt crisis in Europe worsens. Europe’s banking system is the most heavily reliant on wholesale funding in the world.
“The biggest risk to Asian credit markets of a worsening European debt crisis is deterioration in global funding markets. Within the region, we see China and its banks as a safe haven, while Korea remains most exposed to such a crisis in spite of the improvements in the past two-and-a-half years,” the U.S.-based global investment bank said via the report.
It also said that Korean and Australian banks, Asia’s top two most wholesale-funded entities in 2008, have made deliberate attempts to bring down their large portion of borrowing from European and U.S. banks since that year. Currently, Korea’s wholesale funding reportedly makes up approximately 25 percent of its total funding, while that of Australian accounts for up to 50 percent.
“If lenders have a stable and inexpensive source of financing like core demand deposits that banks usually use, raising funds is not a big deal, but the wholesale funding is very sensitive to rapid changes in the financial markets, which can dry up lending,” said Lee Chang-seon, managing director of the financial research department at LG Economic Research Institute (LGERI).
“Financing money from foreign financial markets has been a headache to local banks because they are under pressure to repay debts in unfavorable situations like the current one.”
In the aftermath of Standard and Poor’s decision to strip the United States of its triple-A credit rating for the first time, and the eurozone debt jitters, the Korea Composite Stock Price Index (KOSPI) tumbled 370.96 points, or 17.08 percent, on a six-day skid between Aug. 2 and 9, finishing Thursday’s session hovering just above 1,800.
KB Financial Group led the slide with 23.80 percent during the first 11 sessions of this month, while Woori Financial ended 19.42 percent lower and Hana Financial closed down 11.23 percent. Shinhan Financial was off 14.65 percent and Korea Exchange Bank (KEB) shrank 11.23 percent.
According to the FSC, as of the end of June local lenders’ loans from their European counterparts stood at $42.1 billion, accounting for 36 percent of their total borrowing of $116.8 billion, followed by Asia and the United States, which represented $40.8 billion, or 35 percent, and $32.4 billion, or 28 percent, respectively.
With its reliance on the Asian market declining by 14 percent compared to the end of 2008, those on the European and U.S. markets rose by 10 percent and 4 percent apiece. However, the Financial Supervisory Service (FSS), the FSC’s executive arm, declined to disclose how much each bank relies on foreign funds.
According to the banking industry, in case of any possible repayment demand from Europe, local lenders have come up with measures, including a committed credit line, to cope with it. It legally binds the lender to provide the funds, rather than giving the option of suspending or canceling the credit line based on market conditions.
“We have already agreed to a committed credit line to protect ourselves from a possible credit crunch in foreign exchange liquidity,” said an official of a local commercial bank.
The government has claimed that Korea will be less affected by the current global financial troubles than the previous one in 2008, sparked by the bankruptcy of Lehman Brothers.
“Korea’s economy is healthier than 2008, with the short-term foreign debt to the total dropping from 52 percent in September 2008 to 38 percent in March this year. Banks’ loan-to-deposit ratio has remained below 100 percent, as well,” FSC Chairman Kim Seok-dong said. 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, as well.
However, the situation hasn’t turned out as planned, with the financial markets in tumult.
Appalled by the fallout from the financial turmoil, the government asked banks to diversify their financing sources to include more Middle Eastern loans, rather than just relying on Europe and the United States.
“Considering the trend in the financial market, money converges in the Middle East,” President Lee Myung-bak said Monday.
“As the financial institutions of our country rely greatly on Europe and the United States, we had better think about increasing cooperation with the Middle East in the future.”
The FSC chairman supported the President’s suggestion.
“Overseas debt portfolios are the key factor in dealing with the foreign exchange of the nation’s economy,” he told lawmakers the next day.
“It is a good idea to broaden borrowing sources to others including the money-rich Middle East.”
Banks have been moving to comply with the requests, as Hana Bank issued $400 million yen denominated bonds to secure its foreign exchange liquidity.
Another bank official said, “Since the global financial crisis in late 2008, the banking sector has strived to issue global bonds to secure foreign exchanges.”