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SEOUL, March 24 (Reuters) - South Korea's financial system faces a little more risk in the wake of the U.S. Federal Reserve's interest rate hikes, the Bank of Korea said on Friday, but the system's ability to withstand external shocks was still in "fair condition".
Despite external and internal uncertainties, foreign flows had remained steady, the Bank of Korea said, but should the Fed start raising rates more quickly than expected capital flight could accelerate.
Given South Korea's sturdy financial buffers such as massive foreign currency reserves and a big current account surplus, as of now that possibility looked limited, the BOK said in a statement issued after a meeting to discuss financial stability.
High household debt remained a concern but was not yet at the point where it could turn into a major crisis, the BOK noted, although debtors in the lowest income bracket were vulnerable to higher interest rates.
Those higher interest rates did not pose immediate risks to private entrepreneurs, except for retailers and restaurateurs.
"Retail stores and restaurants are usually established to maintain livelihoods and we've seen many of these get started up and go bankrupt just as easily. That's why we believe the owners of these businesses may face hardship paying their debts," Huh Jin-ho, a deputy governor at the Bank of Korea, told a media conference.
The ability of big corporations to repay debt would not be undermined even if market interest rates jumped the maximum 150 basis points set in a scenario used to test 24,951 companies that had been subject to external audits, the BOK said.
The Bank of Korea said these companies' ratio of operating profit to interest had improved steadily since 2014, but that was largely due to low investment amid economic sluggishness.
The Bank of Korea said businesses in the troubled steelmaking and shipbuilding industries were at greater risk of hardship from higher borrowing rates than other industries. (Reporting by Christine Kim; Editing by Eric Meijer)