By Nam Hyun-woo
Foreign liabilities that domestic banks have to pay back by 2017 have surpassed 40 trillion won, according to market sources, Sunday.
This is an alarming position for the banks because a potential U.S. rate hike could pose a threat to their foreign currency liquidity, on top of the pressure to build up large provisions for potential losses in loans to companies that are subject to government-driven restructuring.
According to sources, Korea’s six major banks owe some 35 trillion won in combined foreign liabilities that will mature in two years. Those banks are the Korea Development Bank (KDB), the Export Import Bank of Korea (Eximbank), KEB Hana, KB Kookmin, Shinhan and the Industrial Bank of Korea (IBK).
The amount surpasses 40 trillion won when including 4.16 trillion won that other banks, such as National Agricultural Cooperative Federation, are liable for.
Of the 37.11 trillion won owed by the six banks, 13.23 trillion won is due at the end of this year, while 21.3 trillion won will mature at the end of 2017.
Three state-run banks, KDB, Eximbank and IBK owe 8 trillion won, 10.98 trillion won and 2.48 trillion won, respectively. Of them, KDB and Eximbank have a respective 3.95 trillion won and 2.78 trillion won in debts which mature this year.
Among commercial banks, KEB Hana has the largest foreign liabilities at 4.34 trillion won, followed by Shinhan with 4.48 trillion won and KB Kookmin, 4.23 trillion won.
The maturing debts are igniting concerns over the banks repayment ability, as a potential key rate hike by the Fed will likely lead to foreign investors withdrawing their dollar-based capital, causing a foreign currency liquidity crunch.
The Fed earlier last week decided to leave its key rate unchanged. Initially, the Fed has suggested it will raise the interest rates four times this year, but now it is widely expected that it will raise the rate twice.
To cope with this, the government announced last week that it will make it mandatory for banks to observe a foreign exchange liquidity coverage ratio (LCR) from next year.
LCR is the ratio of high-quality liquid assets that can be immediately converted into foreign currencies against projected outflows of foreign exchange for 30 days. The banks will have to raise their LCR to 60 percent next year, 70 percent in 2018 and 80 percent in 2019.
A high LCR means banks can cover themselves in times of crisis as they have assets that they can convert into cash, such as government bonds from developed economies or corporate bonds with high credit ratings.
Deepening their woes, domestic lenders may see their credit ratings in the global market being lowered as a side effect of the restructuring of shipbuilders and shippers. Lower credit ratings will cost the banks more in securing foreign capital.
In April, Moody’s lowered the credit ratings of most commercial banks in Korea. Standard & Poor’s, another rating agency, has also started to review credit ratings for the government and the financial sector.