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| A sign for Silicon Valley Bank (SVB) headquarters is seen in Santa Clara, Calif, Friday. Reuters-Yonhap |
Financial authorities wary of ripple effects of US lender's bankruptcy
By Yi Whan-woo
The sudden bankruptcy of Silicon Valley Bank (SVB), Friday, is sparking concerns in Korea of weakened investor confidence that could force foreign investors to scramble for safer assets and lead to a capital exodus from the Korean market.
Financial authorities said, Sunday, they are closely monitoring the effects of the U.S. lender's debacle, which could significantly increase market uncertainties.
"The possibility should not be ruled out that the closure of SVB due to a liquidity crunch can expand market volatility in Seoul," Deputy Prime Minister and Minister of Economy and Finance Choo Kyung-ho said during a meeting attended by senior economic policymakers.
"The government and relevant organizations will monitor the market around the clock, and if needed, take countermeasures promptly, so that any adverse effects (from overseas) do not spread to our economy," Choo added.
Analysts said Sunday that although it is unlikely that the bankruptcy could turn into a full-fledged financial crisis, Korea's financial market can be adversely affected by the unraveling of SVB, noting that Asia's fourth-largest economy is still classified as an emerging market that tends to remain vulnerable to global economic risks.
"Global investors, in search of safe haven assets, are likely to show a greater demand for U.S. dollars in response of the SVB crisis, and that they may sell off their financial assets here," said Joo Won, deputy director of Hyundai Research Institute. "Under the circumstances, it is foreseeable that Korean won's value against the U.S. dollar may weaken further."
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| Deputy Prime Minister and Minister of Economy and Finance Choo Kyung-ho, second from left, speaks during a joint meeting with senior economic policymakers at Korea Federation of Banks in central Seoul, Sunday. From left are Senior Presidential Secretary for Economic Affairs Choi Sang-mok, Choo and Financial Supervisory Service Governor Lee Bok-hyun. They were also joined by Financial Services Commission Chairman Kim Joo-hyun and Bank of Korea Deputy Governor Lee Seung-heon. Courtesy of Ministry of Economy and Finance |
The Korean currency, after rising to the 1,200 won level early this year, has been losing ground against the greenback and weakened to the 1,300 won level in recent weeks as the U.S. Federal Reserve is poised to resume steep rate hikes again.
On Friday, the local currency renewed its yearly low and closed at 1,324.2 won against the U.S. dollar, down 2 won from the previous session.
Lee Sang-ho, head of the Korea Economic Research Institute's (KERI) economic policy team, hinted at the possibility of the benchmark KOSPI tumbling over the downfall of SVB.
He pointed out that the Dow Jones Industrial Average dropped for the fourth straight day and closed down 1.07 percent at 31,909.64 on Friday, when SVB, the 16th largest U.S. bank, went belly up, marking the largest bank failure in the country since the 2008-09 global financial crisis.
On the same day, the S&P 500 lost 1.45 percent to settle at 3,861.59. The Nasdaq Composite retreated 1.76 percent to end at 11,138.89.
"The negative investment sentiment in the U.S. may spread to Korea if the SVB crisis is not settled in a short period of time," Lee said, noting the KOSPI slid for the third straight day and closed down 1.01 percent at 2,394.59, Friday.
SVB collapsed within 48 hours on Friday morning after it faced a sudden run on deposits by its customers.
They scrambled to withdraw money as a steep U.S. rate hike eroded the value of long-term bonds that SVB and other banks gobbled up during the era of ultra-low, near-zero interest rates.
The downfall of SVB is raising concerns especially because it is reminiscent of the 2008-09 global financial crisis, when major investment banks, commercial banks and mortgage lenders hit by the U.S. housing bubble suffered a severe liquidity crunch with worldwide economic repercussions.
Asked about the possible fallout on the Korean banking sector, a spokesman at a commercial bank in Seoul said SVB specialized in lending to tech startups and venture capital firms and that its influence in both the U.S. and abroad will be restricted.
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