Financial firms to undergo stress test

By Na Jeong-ju

Choi Soo-hyun FSS Governor

The governor of the Financial Supervisory Service (FSS), Choi Soo-hyun, indicated on Wednesday that the FSS will conduct stress tests on financial firms to reduce fallout from a possible end to quantitative easing by the United States.

“An interest rate rise will weigh down on local financial firms, which are already suffering from worsening profitability,” Choi told reporters. “We need to closely monitor how they are affected by the external risks and help them prepare for countermeasures through the stress tests.”

The comments came because interest rates on government bonds have skyrocketed and stock prices have fallen amid speculation that the U.S. will drop its expansionary fiscal policy.

Choi forecast brokerage firms will be hit harder than any other financial firms because they have larger bond holdings.

Choi also said that he will keep an eye on short-term foreign borrowing at banks to brace for a possible outflow of foreign capital from the local financial market.

Due to uncertainties surrounding the U.S. exit policy, banks have increased short-term borrowing in foreign currencies as more consumers are rushing to get these loans in pursuit of currency gains.

“A possible tapering of global liquidity and failure of ‘Abenomics’ increases concerns on foreign exchange volatility,” Choi said.

He, however, dismissed worries that the U.S. exit strategy will prompt a massive exodus of foreign capital from the Korean market.

“We have foreign currency reserves worth $328.1 billion and had a trade surplus for 16 consecutive months. We don’t have to be gripped by fear,” he said. “But it is true that lingering jitters about the U.S. and Japanese monetary policies will hurt local financial players to some extent.”

Choi’s assessment is in line with the central bank’s stance. The Bank of Korea cautiously predicted that volatility in the global financial markets will ease gradually because countries are taking measures to reduce their exposure to external risks. The bank, however, warned that an end to the monetary stimulus strategy by the U.S. will have significant negative effects on emerging economies.