FUNDING SWITCH

South Korean commercial banks sought to replace short-term external debts with long-term ones recently, boosting their abilities to self-insure themselves from the potential external shocks.

According to the Financial Supervisory Service (FSS), the rollover rate of domestic banks' short-term foreign debts with a maturity of less than one year averaged 77.7 percent for the first two months of this year. This year's figure was much lower than around 100 percent tallied in three years to 2011.

The refinancing rate of local banks'long-term external debts averaged 315.1 percent during the two months of 2012, more than doubling the figures for the past three years. It hinted that local lenders repaid short-term debts with funds secured through long-term financing.

Financial soundness for local branches of foreign banks also improved last year. Non-depository liabilities such as foreign currency loans, call money loans and interbank loans shrank 7.8 trillion won on-year to 92.2 trillion won (81.51 billion U.S. dollars) in 2011, while depository liabilities grew 1 trillion won to 10.3 trillion won.

MACRO PRUDENTIAL TOOLS

Lengthening maturity of local banks'external debts and reducing non-core liabilities of foreign banks'branches were mainly attributed to the introduction of macro-prudential policy tools.

Caps on banks'foreign currency forward positions limited excessive asset growth by tying total assets to bank equity. Local branches of foreign banks were required to hold foreign exchange derivative positions equivalent to 200 percent of equity capital, with the cap being set at 40 percent for domestic banks.

The leverage cap was aimed at limiting the practice of banks that hedge forward U.S. dollar forward positions by funding short- term U.S. dollar debts. The cap moderated capital inflow into South Korea, according to a paper authored by Shin Hyun Song, a professor of Princeton University.

Meanwhile, macro-prudential stability levy was believed to serve to reduce non-core liabilities as seen in last year's non- depository debts for local branches of foreign banks. Professor Shin said in the paper that the levy has the properties of an automatic stabilizer even if the rate remains constant as the levy bites hardest during the boom when non-core liabilities are large.