Insurance Industry Also Establishes Foreign Currency Liquidity Risk Management Standards... Monitoring Contingent Foreign Currency Demand

Ministry of Economy and Finance to Establish 'Foreign Currency Liquidity Management and Supply System Improvement Plan' on 20th
Supplementing Regulations on Non-bank Foreign Currency Liquidity Ratios and Bank Sector LCR

[Image source=Yonhap News]

[Asia Economy Reporter Jang Sehee] The government has decided to enhance the foreign currency liquidity management system across financial companies to address vulnerabilities in the non-bank foreign exchange sector. Accordingly, not only banks but also the financial investment and insurance industries will be required to establish risk management standards.

On the 20th, the Ministry of Economy and Finance announced the "Improvement Plan for Foreign Currency Liquidity Management System and Supply Framework" containing these measures. The government prepared this plan based on the assessment that the instability in the domestic foreign exchange market and foreign currency funding market during the approximately two-week period from March 5 to March 19 last year (when the Korea-US currency swap was announced) was the highest since the 2008 financial crisis.

Regarding this, a government official stated, "Securities firms face difficulties securing foreign currency liquidity due to large-scale foreign currency margin payments for derivative-linked securities," and added, "Non-bank financial companies have been exposed to vulnerabilities in foreign exchange risk management."

First, a foreign currency liquidity management system at the financial group level will be introduced. Additionally, financial companies will be mandated to establish their own risk management standards concerning liquidity and other factors.

To monitor foreign currency funding in the non-bank sector, three new indicators will be introduced: foreign currency funding and demand, the gap between foreign currency assets and liabilities, and the maturity of foreign currency funding and operations. Monitoring indicators will be developed to reflect not only confirmed and planned amounts but also contingent foreign currency demand such as sudden asset value drops and early repayment requests for foreign currency borrowings.

The ratio of net foreign currency assets (assets minus liabilities) to foreign currency assets will be checked monthly to examine the proportion of funding sourced from the foreign currency funding market. The foreign currency liquidity stress test, currently applied only to banks, will be expanded to include the non-bank sector.

In addition, existing foreign exchange soundness systems will be supplemented to address shortcomings, including the non-bank foreign currency liquidity ratio, the bank sector's foreign currency LCR (Liquidity Coverage Ratio), and the foreign exchange soundness surcharge.

Securities firms will be required to hold foreign currency liquid assets, and the comprehensive position regulation ratio for flexible foreign exchange hedging support will be relaxed up to 30%.

The government plans to establish a "Foreign Exchange Soundness Council" to adjust foreign exchange soundness policy directions and enhance macroprudential stability in the foreign exchange sector. Furthermore, a foreign currency liquidity supply system will be set up through Korea Securities Finance Corporation and others to ensure foreign currency liquidity supply to securities firms during crises.

Meanwhile, the government plans to smoothly operate the repurchase agreement-based foreign currency bond purchase system to ensure that private sector external assets can be appropriately utilized during crises.