Foreign banks in Korea cut asset pools amidst domestic rate hikes

Lenders slashed asset holdings by $5.93b in 2016.

Local branches of foreign banks operating in South Korea have reduced their assets following rate hikes in their respective home countries, according to state news agency Yonhap.

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A total of 55 offices and branches of foreign banks from 17 countries did business with South Korea between 2004 to 2018, according to central bank data. Their combined asset pool hit $246.05b (KRW278.t1) as of end-2016 but have since slashed that asset pool by $5.93b (KRW6.7t) following rate hikes.

"After a one percentage point hike in the home policy rate, the branches reduce borrowing by 2.4 percent of their assets over the following three months," said the report written by BOK economist Yun Young-jin.

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In particular, 14 foreign bank branches with a focus on lending cut down their assets by 7.55%, whilst 13 security trading offices showed no changes in the size of their assets.

"Loan-making branches have longer effective maturities of assets. Interest rate changes directly affect their profits," noted the report.

The government’s macro-prudential policy is also another factor dampening the asset holdings of foreign banks operating in South Korea.

The South Korean government introduced a leverage cap in 2010 forcing foreign lenders to maintain foreign exchange derivative position below a certain level compared to their capital. The leverage cap was increased to 200% in 2016 after being lowered to 150% in 2013.

The goal of the leverage cap regulation is to reduce the volatily of cross-border bank liabilities so that banks fund their investment into the country using more stable long-term borrowing vehicles.

Photo from Jimmy McIntyre - Editor HDR One Magazine - Seoul Cityscape From the Sky Park, CC BY-SA 2.0