Here's what makes Korean banks aptly armed against liquidity shocks

But the improvements could be limited.

Moody's Investors Service says that it expects the Korean banking system's funding structure and liquidity metrics to continue to improve for the coming 12 months.

According to a release from Moody’s Investors Service, this is in line with authorities retaining their conservative stance and guard against potential liquidity shocks.

"However, coming improvements to the Korean banking system's funding and liquidity could be limited, as the banks already have sufficient funding, and holding additional liquidity significantly above current levels would result in downward pressure on profitability," says Jeffrey Lee, a
Moody's Associate Analyst.

Here’s more from Moody’s Investors Service:

Lee was speaking on the release of a new Moody's report, entitled "Funding and Liquidity Profile for Korean Banking System Remains Stable".
According to the Moody's report, commercial banks' KRW loan-to-deposit ratio stabilized at 96.2% at end-March 2014, below the regulator's cap of 100%.

Further, the KRW liquidity ratio -- defined as KRW liquid assets due within one month divided by KRW liquid liability due within one month -- climbed to a seven-quarter high of 132%, which suggests that banks are well positioned to meet their short-term KRW liabilities.

Korean banks have also successfully shifted towards more deposit funding, reducing their dependency on market funding.

"The proportion of low-cost deposits, defined as current and savings deposits, in the banks' deposit base is also increasing, a trend that will help keep down deposit costs and partially offset falling net interest margins," says Lee.

Meanwhile, banks are taking advantage of favorable markets by refinancing, at lower prices, the heavy issuance made during the global financial crisis.

This refinancing requirement will remain a key driver behind their issuance in coming years.

Banks' foreign-currency loan-to-deposit ratios edged up slightly in Q1 2014, driven by their increased purchases of export and exchange bills from exporters.

Moody's expects ongoing export strength to fuel foreign currency inflows and stabilize the ratio. However, Korean banks still have foreign-currency loan-to-deposit ratios higher than their Asian peers due to the presence of policy banks that rely mostly on market funding.
Aside from strong foreign-currency deposit growth, banks are also refinancing foreign-currency debt in longer maturities.

Reflecting this development, the system-wide portion of short-term foreign-currency debt reduced to 16.8% of total foreign-currency debt at end-2013 from 50.1% at end-2008. Finally, Moody's notes that the banks' external liquidity buffers have continued to strengthen.

The five major commercial banks improved their foreign-currency liquidity buffers by expanding committed credit lines from foreign financial institutions, which hit another high in 2013.

The government has also increased its capacity to support foreign-currency liquidity, in times of need, given its falling short term external liabilities and increasing foreign currency reserves.