A dealer works at an around-the-clock trading room in Hana Bank, Seoul, Wednesday. Yonhap
Won depreciation undermines financial stability, affecting borrowers
By Lee Yeon-woo
While the swift lifting of martial law prevented bank runs, continued exchange rate volatility will pose challenges for banks in managing their liquidity and stability, market watchers said Thursday.
Immediately following President Yoon Suk Yeol's declaration of martial law, the exchange rate spiked to 1,446.5 won per dollar around 12:20 a.m. Wednesday. This marked the Korean won's weakest depreciation since the global financial crisis in 2009.
The rate has since stabilized, trading at 1,415.4 won as of 2:40 p.m., Thursday, though it remains elevated.
If the strong dollar phenomenon persists, banks will face challenges in managing their capital. For instance, a strong dollar increases the value of foreign currency liabilities held by banks, reducing their capital adequacy ratios.
For every 10 won rise in the exchange rate, the common equity tier 1 (CET1) ratio of the four major financial holding companies decreases by approximately 1 to 3 basis points.
CET1, the core capital that banks hold as part of their capital structure, measures their ability to withstand financial distress. A decline in this ratio signifies a relative shortage of capital, directly impacting the corporate value assessments of banks.
At a time when major banks have pledged to raise their CET1 ratios as part of their Corporate Value-up disclosures, they are expected to tighten their control over capital management amid ongoing volatility.
Last month, when the exchange rate hovered at the 1,400 range, Shinhan Financial Group Chairman Jin Ok-dong remarked, "Financial institutions will face significant pressure on their BIS (Bank for International Settlements) ratio by December" if the current exchange rate persists.
"This could lead to financial institutions needing to reduce their assets," he added at a meeting hosted by the Korea Chamber of Commerce and Industry.
In the aftermath, loans to small business owners and low-income groups are highly likely to face restrictions. Loans to individuals with low credit ratings carry higher risk weights, and an increase in high-risk weighted loans could adversely impact banks' capital adequacy.
Additionally, the prolonged depreciation of the Korean won could accelerate concerns about capital outflows. If demand for savings and deposit accounts — currently helping mitigate the situation — declines, banks' capital reserves are likely to come under significant pressure.
While the financial sector's impact requires extended observation, analysts believe the current effect on banks is manageable.
"With foreign currency loans comprising 3 to 8 percent of total assets, their solid core capital ratios averaging 15 percent as of the third quarter of 2024 can stay largely unaffected," Rena Kwok, a credit analyst at Bloomberg Intelligence, told The Korea Times.
The Financial Supervisory Service has implemented a 24-hour emergency response system to monitor financial conditions until the market fully stabilizes. It said it is also closely monitoring financial institutions' foreign currency funding conditions and liquidity trends, and in the event of unusual signs, it plans to take all necessary measures.
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