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BOK Working Paper No.2018-15, Reserve Accumulation and Bank Lending: Evidence from Korea

Economic Research Institute (82-2-759-5471) 2018.05.31 5987

Title : Reserve Accumulation and Bank Lending: Evidence from Korea

Author : Youngjin Yun(BOK)


Reserve accumulation is funded by the central bank’s domestic borrowing as it always sterilizes reserve purchases by increasing domestic liabilities. The central bank borrowing could crowd out firms’ borrowing under imperfect international capital mobility. I present a model that illustrates the mechanism and examine monthly balance sheets of Korean banks from September 2003 to August 2008 to find that bank lending to firms did decline after reserve accumulation. Controlling for individual effects and time effects, it is estimated that bank lending declined by 50 cents after one additional dollar of reserve accumulation. A causal relationship is verified by differences-in-differences identification. After one standard deviation reserve accumulation shock, primary dealer banks and foreign bank branches cut lending growth by 0.4 and 1.6 percentage points more than non-primary dealer banks and domestic banks, respectively.