South Korea’s banks get more time to comply with new liquidity requirements

South Korea’s credit market is stabilising after suffering its worst slump since the global financial crisis. 

The country’s credit market experienced a credit crunch after the developer of the Legoland Korea theme park defaulted on its debt in October. 

The government responded to the resulting market turmoil by reactivating a support mechanism, while major banks committed to funds to support the short-term money market. 

Meanwhile, South Korean banks have six more months to improve their short-term resilience to liquidity shocks, while the nation's financial regulators focus on injecting more money into the market to alleviate the credit crunch.

The Financial Services Commission delayed the deadline to meet the higher requirement by six months to mid-2023. The new minimum liquidity coverage ratio (LCR) will be pushed to 95%, up from 92.5%. The regulator opted to give banks greater room to manage enhanced volatility and uncertainties in the current situation. 

BNK Financial Group and NongHyup Financial Group, two of the biggest lenders in the country, both met the requirement at the end of 2021. Hana Financial Group’s LCR stood at 107.65% in 2017, but slumped in the past couple of years, falling to 89.66% at the end of last year. 

However, three of the seven largest banks in the country might have failed to meet the new minimum LCR had the regulator had not delayed the deadline, according to S&P.