The South Korean banking sector is already well ahead of international regulatory benchmarks for capital requirements, according to Lee Sangche, deputy chairman for international affairs at the Financial Services Commission, and Risk.
Sangche clarifies the need to stay ahead of Basel III requirements:
At the Basel Committee meetings, there are advanced countries and developing countries fighting to iron out the details of the requirements. The risk weights for trade finance in the current agreed standards is 100%. It goes to the denominator and if you put high-risk weight on trade finance, it will impact the supply of finance from advanced economies to developing economies. Korea also heavily depends on export income from developing economies so the supply of trade finance is important and will negatively impact countries in Asia. Trade finance is short-term and low-risk financing covered by real economic activity, so a 100% risk weight is too high.
South Korea’s rather responsible approach to capital requirements comes after a series of economic crises over the last decade and a half. In order to shore up issues with foreign exchange liquidity, Korea has restricted foreign exchange positions for banks. This approach has the added advantage of stemming the tide of the quickly appreciating won.
Meanwhile China’s State Administration of Foreign Exchange (SAFE) ramped up over-the-counter deals in foreign exchange. Chinese banks acquired $18.5 billion in FX during November alone.
What’s the impetus behind the FX push in China? The notion that China could use FX funds to secure any potential bailout of its banks – should they need it – is giving confidence to investors.