Health of financial groups

Regulators are on alert after a recent surge in foreign currency short-term debts. The warning is in response to growing instability in the global financial market.
Regulators have compelling reasons to strengthen the monitoring of foreign currency flow. Korea's short-term foreign debts, external liabilities maturing in a year, are approaching the psychologically critical level of $400 billion.
Short-term debts have grown by a double-digit figure of 26 percent in two years. Short-term debt accounts for 60 percent of all foreign-currency liabilities at local banks, lower than 72 percent in 1997 when Korea sought a bailout from the IMF. At branches of foreign banks in Korea, it is at an alarmingly high 87 percent.
Fiscal crisis in the EU, coupled with the U.S. technical default after years of relentless increase in government debt, has strained the global financial market. In just four months, about $70 billion has moved out of Korea.
It is an exaggeration to say that local banks now face currency exposure risks. They need to take preemptive steps to forestall any contingency.
In 2008 when the financial crisis hit the world, local banks belatedly took steps to ease their foreign-currency liquidity shortage.
The government needs to install multi-layered safety mechanisms. CEOs must be subject to reprimand when they are loose in foreign debt management. Penalty fees on short-term foreign debts, which will come into effect next month, should be raised if necessary.
Foreign banks here must be under exceptional monitoring in view of their excessive deployment of short-term foreign debts.
Excessive use of foreign debts is one of many cases showing banks' lax risk management. KB recently redeployed many of its risk managers for marketing.
Monitoring banks alone is not enough. Banks will not be safe when their subsidiaries are in trouble. In Korea, the concept of financial groups is new. Regulators have little experience in supervising in-house trading and risk management of financial groups dealing in banking and non-banking services.
Financial groups have been in excessive competition for growth. This is the time for them to strike a balance between growth and safety.
Their safety is necessary as the government must bail them out when they are in trouble. Who imagined before 2008 that Citibank would need a bailout?
All banks and their subsidiaries must undergo periodic stress tests to check whether they are able to withstand the Black Swan event. The two foreign-owned Korean banks, KEB and SC First Bank, also need audits to ensure their safety. KEB has long been struggling to find a new owner due to the protracted legal battle between its main shareholder Lone Star Fund and the Korean government. SC First Bank is in the midst of the nation's banking industry's longest strike.
Regulators can either consult with the IMF or BIS or hire international consultants to conduct a checkup of financial groups. This is necessary to ensure that banks do not shut the stable door only after the horse has bolted.
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