Moody's: Korean banks' high liquidity coverage ratios well ahead of stricter LCR requirements

Moody's Investors Service says that the high liquidity coverage ratios (LCRs) reported by Korean banks with their March quarterly results are credit positive, and should limit the impact of LCR requirements on bank profitability and operations.

Moody's analysis is contained in its just-published report "Korean Banks: Korean Banks' High Liquidity Coverage Ratios are Credit Positive," by Sophia Lee, Vice President -- Senior Analyst.

"As of March 2015, Korean banks' overall average LCR was 119%, well above the 80% phase-in minimum ratio. Korean banks have shown significant improvement in their overall liquidity profiles, and are well placed to manage the increasingly stringent liquidity requirements being phased in over the year," says Sophia Lee, a Moody's Vice President -- Senior Analyst.

In particular, the results show that regional banks have significantly stronger LCRs--with a 141% average--compared to nationwide commercial banks which had a 108% average at end-March. Policy banks were lower, at 98% for the same period, says Moody's.

This is because regional banks are largely deposit funded, with a lower resultant runoff rate that could lower the LCR.

The minimum 80% phase-in ratio applies to commercial banks, notes Moody's, while policy banks must adhere to a 60% ratio for 2015.

Still, Korea's (Aa3 positive) policy banks are comfortably within this 60% requirement. However, the ratios are still relatively low, due in part to the banks' on-lending of policy loans which are funded with low-cost financing from the government -- in turn subject to a runoff rate of 40% when calculating net cash outflows.

Looking ahead, Moody's expects banks that rely heavily on wholesale funding to have volatile LCRs. In addition, despite the marked improvements in LCRs shown by Korean banks, in past crisis periods Korean banks have been vulnerable to foreign currency liquidity crunches.

The rating agency notes that although there is no global minimum required threshold for LCRs by currencies, Korea's Detailed Regulations on Supervision of Banking Business state that the Financial Supervisory Service may set its own minimum LCR for currencies that account for more than 5% of total liabilities. As of December 2014, Korean banks' average foreign currency liquidity ratios were stable at 111%, above the currently minimum of 100%, set by the Korean regulator.