Possibility of Increased Foreign Currency Loans Due to Government's "High Exchange Rate Defense" Measures
Rising Exchange Rate Increases Won-Converted Amount, Negatively Affecting Soundness Indicators
Year-End Financial Statements Reflect Exchange Rate... Close Attention to Impact
As the high exchange rate, exceeding the 1,470 won level, continues at the end of the year, banks are feeling increasing pressure. This is because the volume of foreign currency loans has grown in the fourth quarter, and the government's "high exchange rate defense" measures have increased the possibility of further expansion. Nevertheless, the persistent won-dollar exchange rate remains a burden for year-end financial statements.
According to the financial sector on December 23, the outstanding balance of foreign currency loans at the five major domestic banks (KB Kookmin, Shinhan, Hana, Woori, and NH Nonghyup) stood at $7,669.49 million as of the end of last month.
The outstanding balance of foreign currency loans has been rising again in the fourth quarter. After dropping to $6,551.21 million in September, the last month of the third quarter, it increased to $6,852.12 million in October and expanded further in November. The November balance rose by $1,118.28 million compared to the end of September. When converted at the previous day's weekly closing won-dollar exchange rate (1,480.1 won), this amounts to an increase of approximately 1.6552 trillion won. Although there has been a slight decrease in December, the balance still remains in the $7 billion range.
Amid this, the government has expanded the scope of foreign currency loans as part of its high exchange rate measures, increasing the likelihood of further growth. On December 18, the government extended the use of foreign currency loans, previously limited to domestic facility funds for export companies, to include domestic operating funds and other management purposes. The idea is that export companies borrowing in dollars and converting them to won will bring more dollars into the domestic foreign exchange market, thereby easing upward pressure on the exchange rate.
The problem is that an increase in foreign currency loans during periods of high exchange rates can negatively impact banks' risk management. All loans are assigned risk weights based on factors such as borrower creditworthiness to calculate risk-weighted assets (RWA). For foreign currency loans, the amount is calculated based on the won-converted value, so when the exchange rate rises, the won-converted amount increases, which inevitably raises the RWA. This can lead to a deterioration in bank soundness indicators such as the capital adequacy ratio (BIS) and the common equity tier 1 ratio (CET1), both of which are calculated based on RWA. A banking industry official said, "Unlike facility funds, it is structurally more difficult to specify the use of operating funds, so they carry a higher risk weight."
From a risk management perspective, expanding the scope of foreign currency loans for use as operating funds is also seen as a burden. One banking sector official said, "Operating funds are used for business operations, so the scope is very broad and the uses are wide-ranging. While all loans require post-management to ensure the funds are actually used for business purposes, it is relatively difficult to provide evidence for operating funds." He added, "This could increase the burden of risk management, such as additional responsibilities for post-audit or the need to set aside more loan loss provisions."
Although the government is making every effort to reverse the trend by introducing a series of high exchange rate measures, the elevated exchange rate level has not come down easily. The high exchange rate is also a burden for banks with a large proportion of foreign currency assets in their year-end financial statements. The year-end settlement is based on the first posted exchange rate (base rate) on the last trading day of December, which can affect not only banks' financial statements and soundness indicators, but also next year's business plans. A financial sector official said, "Considering the burden of loan loss provisions that overseas branches must set aside and the cost of hedging, it can also impact performance."
The government is expected to mobilize all available measures to keep the exchange rate as low as possible during the remaining six trading days. However, the market believes that despite the government's efforts, the year-end closing rate is likely to be formed around 1,475 won. This is even higher than last year's December 30 rate of 1,472.5 won, which was the highest in 27 years. Baek Seokhyun, a researcher at Shinhan Bank S&T Center, said, "While the presence of the foreign exchange authorities, who are determined not to overlook the high exchange rate, is helping to defend the upper limit, it is questionable whether this will be as effective as the exchange rate level itself." He added, "Domestic supply and demand still favor dollar buying, and external conditions such as the decline in French and Japanese government bond prices are also contributing to the dollar's upward trend."
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