The Financial Services Commission (FSC) along with the Financial Supervisory Service (FSS) conducted two round of strengthened regulation on FX soundness of financial institutions. The details of the conducted areas were on 2010, January, 1st increased long term financial procurement ratio, domestic banks’ FX liquidity risk management, and FX derivatives trading risk management standards. And for 2nd round of conduct was held on 2010, August, on management of FX liquidity ratio, strengthened regulations on long term financial procurement ratio, and lastly risk management of FX liquidity ratio of foreign banks’ Korea branches.
Both domestic and foreign banks in Korea were followed and the results are, in most parts FX liquidity ratio and long term financial procurement ratio has improved. However, some banks are working on improving risk management standards on FX liquidity and under the supervision of the FSS, it would have strengthened measures by the end of year 2010.
*most of the risk management systems and standards on various areas are set and operated by banks’ own guidelines.
Some of the key results obtained by the FSC are the followings.
1. FX liquidity ratio
All the banks had higher ratio than regulation guidelines. The general trend is upwards from this year and the numbers are good even after the 2nd round of implemented regulation on FX soundness.
*100% were applied for all of FX assets before however, since 2010, July, counting the potential recovering ratio it now is leveled from 35% to 100%.
FX liquidity ratio of Domestic Banks
(all in %)
Strengthened Regulation 2008 December 2009 December 2010 March 2010 June 2010 July 2010 August
FX liquidity ratio 98.9 105.1 106.8 107.4 109.7 109.2
Applied – – 94.6 97.1 98.7 98.8
7-day gap ratio 3.2 2.8 2.1 2.4 2.5 2.7
Applied – – 0.8 0,7 1.6 2.2
30-day gap ratio 0.4 1.1 2.3 2.3 3.5 3.9
Applied – – -1.4 -0.4 0.7 1.0
2. Long term financial procurement ratio
When measuring the ratio, the leverage standard was changed to over a year, however, domestic banks’ average ratio was over 130% and met the regulation.
*based on 17 domestic banks with more than USD 50 million of FX loans.
**after the strengthened regulation on 2010, August, the guideline ratio was increased to 100% and changed its manual to long term financial procurement ratio.
Long term financial procurement ratio of domestic banks
(all in %)
FX leverage 2008 December 2009 December 2010 March 2010 May 2010 June 2010 July
Procurement ratio (>90%) = year 105.6 139.6 – – – –
> year – 128.9 134.5 130.5 132.7 138.5
3. Stable FX assets Ratio
All the numbers were over the minimum ratio for domestic banks. It was 6.7% (USD 9.71 billion) of all FX reserves, resulting in well above the minimum ratio.
*Based on domestic banks with obligation to FX assets.
**2% is the minimum ratio.
4. Risk management of FX liquidity ratio.
Some banks are improving on this matter, however, most domestic banks set up internal guidelines and standards for better risk management of FX liquidity ratio. Some banks are expected to enhance the soundness of the systems by the end of the year.
5. Risk management of the FX derivatives.
All the banks operating in Korea including foreign banks’ Korea branches are trading under 125% of the previous months real transactions. And after the strengthened regulation, it was regulated to 100%.
After the supervision, most banks were trading under 50% level of real transactions.
As shown from data and numbers above, the FSC has strongly implemented strengthened regulation on FX soundness of the financial institutions. Often times blamed for main causes of the Korean financial crisis, the FX soundness should be improved and checked upon as solid as possible. The FSC plans to regularly evaluate and secure the maintenance of the FX soundness.
Jang Hee Jin (firstname.lastname@example.org)