By Kang Seung-woo
Multiple local commercial banks could collapse within three months if the current credit crunch in Europe evolves into another global financial crisis, a stress test showed Thursday.
As part of countermeasures to a worst-case scenario, the country’s financial authorities have ordered lenders to strengthen their foreign currency liquidity by the end of this year.
The Financial Services Commission (FSC) and its executive unit, the Financial Supervisory Service (FSS), said Thursday that they carried out simulations in late August to test how well Korea’s 18 commercial banks are prepared to withstand a potential global financial crisis in terms of foreign currency liquidity.
They did not specify how many players could not pass the rigorous test but a majority failed to make the cut.
“The stress test on banks was strict enough to presume a crisis as big as that of 2008. The financial regulators are calling for them to substantially beef up their foreign exchange liquidity conditions to satisfy guidelines by the end of the year,” an FSS official said.
A stress test is typically conducted to measure how well lenders could endure the worst-case market scenario and the FSS has been carrying out such tests on a quarterly basis since the second half of last year.
The stress test, based on the second-quarter foreign exchange liquidity of banks here, considered a variety of requirements, including the ratio for foreign currency debt refunding and the size of securable foreign currency assets to see if they could hold up to a financial tumult for more than three months with no help from the government.
In a related move, FSC Chairman Kim Seok-dong reportedly stressed in a staff meeting on Wednesday the need for financial regulators to closely monitor liquidity problems.
According to the financial authorities, foreign currency borrowing is getting tougher due to mounting concerns of a second financial meltdown, with the August spread for domestic lenders’ foreign currency loans up 0.2 percentage points from the previous month.
Asia’s fourth-largest economy was hit hard by the shortage of foreign currency liquidity at banks twice ― in the 1997-98 Asian financial crisis and the global economic turmoil in 2008.
During the financial swoon, local banks with high short-term external debt had trouble in refinancing foreign currency debt or securing foreign exchange liquidity, as foreign investors scrambled to exit from Korea.
Despite the test result, the FSS believes that the possibility is low for banks to see their foreign exchange liquidity worsen suddenly, citing a few Chinese and European banks borrowing dollars from their Korean counterparts of late.
In addition, banks are striving to live up to the watchdog’s guidelines.
Kookmin Bank recently inked a $100 million foreign currency committed line with an overseas financial firm, while Woori Bank secured a similar one worth $1 billion midway through last month.