The FSS, the Republic of Korea’s financial regulator, on Monday (June 20) urged the country’s banks to strengthen their loss-absorbing capacity.

FSS Chairman Lee Bok-Hyun, meeting with the heads of South Korea’s major banks, called for efforts to better manage foreign liquidity amid growing uncertainty due to global monetary tightening and a possible economic recession.

“Current economic conditions show signs of a complex crisis in which risk factors are emerging from the U.S. Federal Reserve’s sharp rate hikes, the protracted war in Ukraine and supply chain disruptions,” Lee said at the meeting.

On the other hand, indicators of banks’ strength remain good for the time being, but they need to carefully prepare for the risks of a possible crisis materializing as a result of high-interest rates and inflation, he noted.

Lee Bok-Hyun, for example, urged banks to do everything possible to better manage the strength of their assets and foreign liquidity, which are directly linked to sovereign credit ratings. He further noted that the global economy is facing a growing possibility of stagflation, a combination of high inflation and slowing growth, pointing out that the Korean economy is facing increasing downside risks as its stock, bond and currency markets have recently experienced increased volatility.

The FSS warning comes at a time when inflation and borrowing costs are likely to rise further, prompting South Korean banks to prepare for risks of higher debtor delinquencies, especially in light of deteriorating economic conditions.