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Banks' Financial Intermediation Role in Korea(vol.9 No.1)

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Banks' Financial Intermediation Role in Korea(vol.9 No.1)

 During the recent period of recession, Korean banks' loans to SMEs have decreased greatly. Banks' weakened financial intermediation role could impair the effectiveness of monetary policy as well as that of resource allocation. This paper identifies factors affecting Korean banks' recent weak financial intermediation role, through theoretical and empirical analyses. From these analyses, it derives policy measures for strengthening Korean banks' financial intermediation role.
  The results of the empirical analysis show that the weakening of Korean banks' financial intermediation role has been mainly caused by structural changes in the banking industry. Firstly, in the course of financial consolidation among banks in Korea, the cost to banks of lending to SMEs has increased. As banks have attached more importance to short-term profits, they have reduced their long-term credits. Loans to firms have declined as foreign and domestic banks prefer to lend to households. On top of this, Korean commercial banks have reduced their riskier assets such as SME loans and long-term loans, out of a preference for safer asset holdings. In order to improve banks' financial intermediation role, the Korean financial authorities need to take the following policy measures: strengthening local banks' business capabilities, heightening corporate governance structures and accounting systems, increasing the allocation to internal reserves of banks' profits, and enlarging the number of instruments available for sharing the risks of bank lending.

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