Financial Institutions on High Alert

The recent martial law declaration in South Korea has put the financial sector on high alert. Financial institutions are closely monitoring liquidity levels and the impact on capital adequacy ratios in real time, preparing to respond swiftly to market changes. Financial authorities plan to meet with the heads of major financial holding companies, industry associations, and policy finance institutions to ensure market stability and ease concerns.

Impact on Capital Adequacy Ratios

According to the financial sector on Dec. 8, the Bank for International Settlements (BIS) capital adequacy ratios of major financial groups, including KB, Shinhan, Hana, and Woori, are estimated to decline by 0.01 to 0.02 percentage points for every 10-won increase in the dollar-won exchange rate. The BIS capital adequacy ratio, a key indicator of bank soundness, is calculated by dividing a bank's capital by its risk-weighted assets (RWA). As the volume of risk-weighted assets increases, the ratio declines. Recent upward pressure on the exchange rate has raised concerns that the higher proportion of foreign currency-denominated assets could complicate BIS ratio management.

Market Reactions and Future Predictions

A financial industry official said, "Although exchange rate volatility has increased since the martial law incident, it remains within manageable risk scenarios. However, given the potential for heightened uncertainty, we are adopting a more conservative risk management approach." In the Seoul foreign exchange market, the overnight dollar-won exchange rate closed at 1,423 won on Dec. 7 at 2 a.m., up 3.8 won from the previous session's closing rate at 3:30 p.m. This marked the third consecutive day of increases following the martial law declaration. If banks adjust their capital adequacy ratios in response to the rising exchange rate, they may first reduce loans to small and medium-sized enterprises, which carry higher risk weights. This could negatively impact the broader economy.

Political Instability and Exchange Rate Pressure

As the political situation shifts from martial law to a potential impeachment crisis, the likelihood of prolonged political instability has increased. Domestic and international experts anticipate stronger upward pressure on the exchange rate as a result. On Dec. 7 (local time), Bloomberg reported that Adarsh Sinha, co-head of Asia rates and foreign exchange strategy at Bank of America (BofA), predicted that "political uncertainty could persist longer due to the failed impeachment, potentially causing the exchange rate to surge further when markets open on Monday, Dec. 9." He added, "With the weak economy increasing the chances of interest rate cuts, the impeachment failure could lead to a sharp depreciation of the won."

Authorities' Response Measures

Financial authorities plan to enhance communication with financial institutions to mitigate uncertainty. The Financial Services Commission (FSC) is considering a financial market review meeting this week involving the heads of KB, Shinhan, Hana, Woori, and Nonghyup financial groups, as well as financial association leaders and policy finance institutions. The authorities are expected to urge firms to secure adequate foreign currency liquidity. The Financial Supervisory Service (FSS) plans to hold a series of meetings with industry representatives, including a meeting with bank loan and funding executives on Dec. 9 and a session with savings bank CEOs on Dec. 10. Earlier, the FSS held meetings with securities firm CEOs on Dec. 5 and chief risk officers (CROs) of insurance companies on Dec. 6.