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Foreign Currency Noncore Bank Liabilities and Macroprudential Levy in Korea

Abstract: Using bank-level data in Korea, we examine empirical properties of foreign currency noncore bank liabilities and assess policy effectiveness of the macroprudential levy introduced in postcrisis Korea. Our panel regression and VAR analyses indicate that the foreign currency noncore bank liability ratio yields significant information on the vulnerability of banks, and the macroprudential levy has exerted nontrivial effects on the noncore funding of banks, leading to the mitigation of foreign currency liquidity risks of Korea’s banks. Our findings strengthen the rationale for using appropriate macroprudential policies as a guard against financial vulnerability in open emerging economies.