WHERE CRISIS COMES FROM

Limiting excessive growth in banks'assets and non-core liabilities should be had in mind in designing macro-prudential tools as those two factors were the main causes for the past financial crises. It was so for emerging economies such as South Korea.

According to Professor Shin, excessive asset growth cannot be addressed by boosting loss absorbency of bank capital. For example, Allied Irish Bank (AIB)'s Tier 1 capital ratio was at the peak of 8.2 percent in 2006, and stayed at the mid-7 percent range over the later two years. But the capital ratio did not issue timely warnings for the 2008 global financial crisis and called into question relying on capital ratios.

Excessive asset growth is mirrored on the liabilities side of banks'balance sheet. In a lending boom when credit is growing very rapidly, the core funding such as retail deposits does not fund the rapidly growing bank credit, so other sources of funding are tapped, boosting the increase in non-core liabilities such as wholesale funding.

In emerging economies, non-core funding grew in line with foreign exchange borrowing. South Korean banks'non-core liabilities, including foreign exchange borrowing, expanded rapidly in the run-up to the 2008 financial crisis. The ratio of non-core liabilities of South Korean banks as a proportion of M2 surged to 50 percent in January 2009 from 15 percent logged nine years earlier.