Banks Increase Foreign Currency Borrowings to Enhance Liquidity

South Korean depository institutions’ external debts totaled 271,346.9 billion won in the first quarter of this year, up 7 percent from the previous quarter and up 11 percent from a year ago. In addition, the debts increased by approximately 20 percent compared to two years ago. In that quarter, their short-term and long-term external debts added up to 141,774.8 billion won and 129,615.7 billion won, respectively. In short, the banking sector’s external debt showed a substantial increase during the spread of COVID-19.

According to experts, this is because South Korean commercial banks increased their foreign currency borrowings for foreign currency liquidity enhancement with the pandemic adding to the instability of international financial markets.

The increased debts in the banking sector have some negative implications. Especially, its external debt burden increases when the won-dollar exchange rate continues to rise. At present, the exchange rate is rising due to rising tensions between the United States and China. External debt repayment may not be easy if the exchange rate rises and external risk factors hinder foreign money flow into the sector.

“Debts in many cases are rolled over based on a currency swap contract and foreign currency procurement at a high won-dollar exchange rate requires more local currency provided as collateral, which may affect local banks’ foreign currency liquidity,” said a banking industry source, adding, “Besides, a bank’s foreign currency procurement costs may increase if an increase in external debt leads to a decline in its credit rating.”

Still, it is also said that the situation is not that worrisome in view of local financial market conditions. “South Korea’s international reputation has improved thanks to its excellent response to the pandemic and the government is forestalling exchange rate volatilities attributable to capital outflow by means of its stock and bond market stabilization funds,” an economist explained, adding that individual investors purchasing safe assets such as the U.S. dollar and gold are also contributing to exchange rate stabilization.

Copyright © BusinessKorea. Prohibited from unauthorized reproduction and redistribution