Financial Supervisory Service to conduct stress tests

Korea’s financial watchdog said yesterday that it will conduct stress tests on the country’s financial holding firms in a bid to shield the country from a potential financial crisis.

The Financial Supervisory Service has been conducting stress tests on players in each financial sector on a quarterly basis, and pressing banks, insurers and securities firms to beef up their foreign currency liquidity and other financial health.

Stress tests are usually conducted to measure how well lenders and other players could potentially withstand the worst-case market scenario.

Under the newly-set guidelines for financial holding firms that go into effect next month, they are required to map out contingency plans and draw up an early warning system for possible financial turmoil.

Korea learned a painful lesson about the importance of strengthening banks’ foreign currency liquidity after experiencing the 1997-98 Asia-wide financial crisis and global financial turmoil.

During the height of the global financial storm, Korean banks, saddled with high short-term external debt, had difficulties in refinancing foreign currency loans and securing FX liquidity, as foreign capital fled the country en masse.