The exchange rate of the won against the U.S. dollar in the mid-1400s is settling into a "new normal," prompting banks to actively manage their foreign currency reserves. The banking sector is increasing its cash holdings readily accessible to adapt to the high exchange rates amid the possibility of rapid market changes.
According to the Bank of Korea's ‘minutes of the 4th Monetary Policy Committee meeting of 2025’ on the 20th, discussions among Monetary Policy Committee members regarding this issue appear to have taken place. One committee member questioned the reason why the drop in the exchange rate has been constrained despite the domestic political risk easing somewhat, stating that "last year, concerns about the management of risk-weighted assets by some banks were high due to rising exchange rates, but with high exchange rates being maintained for a significant period, financial institutions are likely to have adapted now."
The relevant department also responded, saying, "Most domestic financial institutions have secured sufficient foreign currency liquidity, and considering the International Settlements Bank (BIS) capital ratio and liquidity coverage ratio (LCR), there seems to be no significant difficulties for financial institutions at the current exchange rate level."
Typically, as the won-dollar level increases, the BIS capital adequacy ratio, a key asset soundness indicator for banks, and the liquidity indicator, foreign currency LCR, deteriorate. The BIS capital adequacy ratio is calculated by dividing a bank's equity by its risk-weighted assets (RWA). When the exchange rate rises, the exposure to foreign currency assets increases, thereby increasing the denominator, which leads to a decrease in the BIS capital adequacy ratio.
The foreign currency LCR is the ratio of highly liquid assets, such as dollars and U.S. government bonds, that banks must hold to prepare for net foreign currency outflows over the next 30 days. When the exchange rate rises, the need to provide more collateral for derivative transactions and a decrease in foreign currency deposits contribute to a reduction in the LCR. With the won-dollar exchange rate averaging 1,450.7 won in the first quarter of this year and the mid-1400s settling as a "new normal," commercial banks have been keenly attentive to soundness management.
In reality, banks have been actively managing their foreign currency LCR ratios and adapting to the high exchange rates. The government regulates that the foreign currency LCR ratio must exceed 80%, but banks are uniformly managing theirs at over 150%. As of the end of February, the LCR ratios of the four major commercial banks were 181.62%, with ▲Hana Bank at 240.30%, ▲Woori Bank at 178.3%, ▲KB Kookmin Bank at 142.08%, and ▲Shinhan Bank at 165.88%. The LCR ratio for the four major banks at the end of September last year was around 161.8%, indicating an increase.
While reserves are ample, banks are showing a trend of continuing to increase foreign currency deposits. This is because if exchange rate volatility expands again, the burden of managing foreign currency liquidity for financial institutions may increase. In fact, in February, the balance of dollar deposits at commercial banks experienced fluctuations in the trillion won range within a single day.
A representative from one commercial bank noted, "Currently, the LCR is relatively high and has been steadily increasing since the high exchange rates, so there seems to be no impediment to risk response," but added, "In the long term, considering capital outflows and other factors, banks are taking conservative planning measures."