LACK OF FOREIGN CURRENCY DEPOSIT

Reducing non-core foreign debts will be a key to mitigate vulnerabilities to the potential systemic risk for South Korea. Excessive asset growth was tackled by tying banks'assets to equity capital, and a growth in non-core liabilities, especially short- term foreign debts, reduced after adopting the macro-prudential stability levy.

However, South Korea has an ingrained weak point. That is lack of foreign currency retail deposits. Vice Finance Minister Shin Je- yoon said in early March that the country's foreign currency retail deposits stood merely at 30 billion U.S. dollars as of now, stressing that foreign currency should be funded within the country as the South Korean won is not a reserve currency.

As seen in the case for local branches of foreign banks, non- depository liabilities such as short-term foreign currency loans and call money loans were almost nine times as much as depository liabilities in 2011 even though non-depository liabilities contracted. Additionally, South Korean banks did not hold sufficient foreign currency retail deposits.

The adoption of three macro-prudential measures enhanced the country's ability to deal with the potential crisis to some extent, but concerns will not disappear over the foreign capital exodus until sufficient buffer of foreign currency retail deposits is raised.