South Korean currency saw its volatility sharply down recently compared with the 2008 global financial crisis, indicating that enhanced financial soundness in the banking sector and the introduction of macro-prudential measures strengthened the country's resilience to external shocks.

According to a report released Sunday by LG Economic Research Institute (LGERI), South Korean won's volatility against the U.S. dollar under external shocks fell below the average level in 2012. The average level was based on an assessment of 47 currencies, including the South Korean won.

The won's volatility soared to 1.76 percent in September 2008 when Lehman Brothers collapsed, higher than the average level of 0. 86 percent. The figure was the second-highest following the Brazilian real. The volatility jumped to 1.07 percent in May 2010 when Greece sought bailout funds, higher than 0.59 percent for the average of other currencies.

However, the volatility dropped to 0.54 percent when the U.S. sovereign rating was downgraded for the first time in August 2011, almost the same as an average 0.53 percent. The won's volatility even fell to 0.36 percent in May 2012 when uncertainties over Europe's debt crisis spread, lower than the average level of 0.42 percent.

The local think tank noted that improved financial soundness in the banking sector, growing foreign exchange reserves and the introduction of macro-prudential measures contributed to stable movement of the South Korean won against the greenback.

Banks' financial soundness has been improved much following the 2008 global financial crisis. The ratio of short-term foreign debts against banks' total outstanding external liabilities came in at 33.8 percent as of the end of June, sharply down from 51.9 percent in September 2008. The rate of short-term debts to foreign reserves fell from 79.1 percent to 45.3 percent over the cited period.

The country's foreign reserves amounted to 314.35 billion U.S. dollars as of end-July. The July figure neared to the record high of 316.84 billion U.S. dollars registered three months earlier. The reserves stayed above the 300-billion-dollar mark since April 2011 when it topped the level for the first time.

The so-called "Triple Set" macro-prudential policies, which were adopted to alleviate rapid capital flows in and out of the country, were assessed to reduce the won's volatility. The Triple Set measures include the caps on banks' foreign exchange forward positions, taxes on foreign investment in local bands and the macro-prudential stability levy on banks' non-depository foreign debts that were introduced in October 2010, January 2011 and August 2011 respectively.

Reflecting the South Korean economy's resilience to external shocks, Moody's upgraded last Monday the country's sovereign rating by one notch to 'Aa3.' The upgraded rating was the fourth- highest among Moody's investment grades, and equaled to those of China and Japan. The rating agency cited strong fiscal fundamentals, economic resilience and reduced external vulnerability of the banking sector as the reason for the upgrade.

Helped by the resilient fiscal and economic fundamentals, the Korea Treasury Bond (KTB) yields were stabilized on the downside. Volatility of the KTB yields stayed below the average level even during the 2008 global financial crisis, implying that the South Korean government bond may act as a safe haven amid a series of credit rating downgrades in advanced nations. Foreign holdings of KTBs reached 89.6 trillion won (79 billion U.S. dollars) as of end- July, the largest in the country's history.

"Despite growing concerns over economic slowdown at home and abroad, the local financial market has shown relatively stable picture recently. This is due partly to a reduction in global shocks, but it is also ascribable to qualitative improvement of the local financial market," said Kim Kun-woo, a research fellow at LGERI.