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Interest rate and exchange rate exposures of banking institutions in pre-crisis Korea

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  • Joon-Ho Hahm

Abstract

This study empirically investigates interest rate and exchange rate exposures of banking institutions in pre-crisis Korea. Using the sensitivity of stock returns as a measure of the exposure, it is shown that Korean commercial banks and merchant banking corporations had been significantly exposed to both interest rate and exchange rate risks, and that the subsequent profitability of commercial banks was significantly associated with the degree of pre-crisis exposure. The evidence suggests that, along with the negative exposure of banking institutions, the sharp depreciation of the Korean won and high interest rates at the end of 1997 further deteriorated the banking sector's capital adequacy worsening the financial crisis. The Korean case highlights the importance of upgrading financial supervision and risk management practices as a precondition for successful financial liberalization.

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  • Joon-Ho Hahm, 2004. "Interest rate and exchange rate exposures of banking institutions in pre-crisis Korea," Applied Economics, Taylor & Francis Journals, vol. 36(13), pages 1409-1419.
    • Handle: RePEc:taf:applec:v:36:y:2004:i:13:p:1409-1419
    DOI: 10.1080/0003684042000206979
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    4. Papadamou, Stephanos & Siriopoulos, Costas, 2014. "Interest rate risk and the creation of the Monetary Policy Committee: Evidence from banks’ and life insurance companies’ stocks in the UK," Journal of Economics and Business, Elsevier, vol. 71(C), pages 45-67.
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