The won-dollar exchange rate has surpassed 1500 won and continues to rise, creating tension across the banking sector. A prolonged high exchange rate could increase costs for foreign currency procurement and raise risk-weighted assets (RWA) due to the revaluation of foreign currency assets, thereby complicating capital ratio management.
According to the Seoul foreign exchange market on June 7, the won-dollar exchange rate closed at 1559.0 won during overnight trading on June 6, up 19.9 won from the previous day's closing price. This marks the highest level since March 2009, during the global financial crisis. At one point, the rate peaked at 1561.5 won, exceeding the 1560 won mark.
The average quarterly exchange rate has also soared to its highest level since the foreign exchange crisis. According to the Bank of Korea's economic statistics system, the average exchange rate for the second quarter, as of June 5, was 1490.98 won, the highest level in nearly 28 years since the first quarter of 1998 (1596.88 won). This has led to speculation that the high exchange rate in the 1500 won range may become a structural norm.
Since the Middle East crisis at the end of February, the trend of high exchange rates has solidified, raising alarms within the banking sector. This situation is expected to impact both foreign currency liquidity and asset soundness.
The primary concern is the decline in the common equity tier 1 (CET1) capital ratio, a key indicator of bank soundness. As the won-dollar exchange rate rises, the value of foreign currency assets, such as dollar loans held by banks, increases, leading to an expansion of RWA and heightened risk due to volatility. It is estimated that for every 10 won increase in the exchange rate, the CET1 ratio decreases by an average of 1 to 3 basis points (0.01 to 0.03 percentage points).
Considering that the exchange rate was 1432.5 won on February 26, before the U.S. and Israel launched airstrikes on Iran, there has been pressure for a decline in the capital ratio of over 10 basis points. According to the Financial Supervisory Service, the average CET1 ratio for domestic banks was 13.41% in the first quarter, still above the regulatory requirement of 8%. However, concerns are growing that if the exchange rate remains above 1500 won, the capital buffer could be rapidly depleted.
The impact of high exchange rates also directly affects banks' foreign exchange trading losses. The profit and loss from foreign exchange transactions for banks is calculated based on fluctuations in the exchange rate of their foreign currency assets and liabilities. As exchange rate volatility increases, the won-denominated value of foreign currency assets and liabilities changes rapidly, affecting profitability.
If high exchange rates persist, banks may also face challenges in their overseas operations. Typically, banks allocate annual RWA limits at the beginning of the year, but if high exchange rates continue, the won-denominated amount of the same loans increases, raising the proportion of RWA. This effectively reduces the banks' operational capacity.
A financial sector official stated, "If the high exchange rate situation continues, it could adversely affect banks' soundness and profitability, as well as their lending operations. Maintaining a stable capital ratio will be a key challenge for the banking sector for the time being."
* This article has been translated by AI.
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