December 9, 2024 – South Korea’s financial sector is on high alert as the country faces heightened political instability following the recent martial law declaration and its subsequent reversal. Financial institutions are closely monitoring liquidity levels and the potential impact on their capital adequacy ratios, preparing to respond quickly to market changes. The fallout from the political turmoil, compounded by rising exchange rate pressures, has raised concerns about the stability of the financial system.
According to industry sources, the Bank for International Settlements (BIS) capital adequacy ratios of major South Korean financial groups, including KB, Shinhan, Hana, and Woori, are projected to decline by 0.01 to 0.02 percentage points for every 10-won increase in the dollar-won exchange rate. The capital adequacy ratio, a key indicator of financial health, reflects the proportion of a bank’s capital to its risk-weighted assets (RWA). When the value of foreign currency-denominated assets increases—due to fluctuations in the exchange rate—the capital adequacy ratio may be negatively impacted.
The increase in the won-dollar exchange rate has sparked concerns, particularly as the rise in foreign currency-denominated assets could complicate the management of the BIS ratio. While financial institutions have managed the volatility thus far, they are adopting a more cautious approach to risk management. On December 7, the dollar-won exchange rate closed at 1,423 won, marking a 3.8-won increase from the previous session, and it was the third consecutive day of rising rates. Should the exchange rate continue to climb, banks might respond by reducing loans to small and medium-sized enterprises (SMEs)—which are considered riskier—potentially impacting the broader economy.
Political instability is adding to the uncertainty, with some lawmakers calling for President Yoon Suk Yeol’s impeachment following the controversial martial law declaration. Analysts predict that the political crisis could result in a prolonged period of uncertainty, exerting additional upward pressure on the exchange rate. According to Adarsh Sinha, co-head of Asia rates and foreign exchange strategy at Bank of America, political uncertainty could persist, potentially causing the won to depreciate further as markets open.
Woori Bank economist Park Hyung-jung noted that the ongoing political instability, coupled with foreign investor aversion to South Korean assets, could contribute to further exchange rate pressure. Experts also anticipate that the situation could worsen in early 2025, particularly with the upcoming inauguration of U.S. President Donald Trump.
In response, South Korea’s financial authorities are stepping up efforts to stabilize the situation. The Financial Services Commission (FSC) plans to meet with the heads of major financial groups and policy finance institutions to assess the situation and ease concerns. The authorities are also urging firms to maintain adequate foreign currency liquidity.
Additionally, the Financial Supervisory Service (FSS) has scheduled meetings with industry representatives, including bank loan and funding executives, to discuss risk management strategies. The FSS is also considering the implementation of market stabilization measures, including a 10 trillion won ($6.97 billion) stock market stabilization fund and a 40 trillion won bond market stabilization fund.
Despite the ongoing concerns, Lee Bok-hyun, Governor of the FSS, stated that the stock market stabilization fund has not yet been activated as the situation remains manageable. However, he emphasized that additional measures and contingency plans are in place to address potential future disruptions in the market.
This heightened vigilance by South Korea’s financial institutions and authorities underscores the challenges posed by political turmoil, exchange rate volatility, and investor uncertainty, as the nation grapples with its current crisis.
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