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[2012-8]Analysis of Determinants of Bank Lending in Korea

Research Department(Financial Markets Team(+82-2-759-4475, 4470)) 2012.09.11 6169


The growth of bank lending in Korea, which was rapid in the mid-2000s, slowed greatly after the global financial crisis in 2008, and has been showing a modest recovery since 2011. This paper classifies the determinants of bank lending in Korea into demand and supply factors and examines them by sector.


The estimation was made using a 2-stage error correction model, with bank lending divided into the corporate sector and the household sector; the corporate sector being subdivided into large corporations and small and medium-sized enterprises (SMEs), and the household sector being subdivided into mortgages and the other household loans. The results reveal that, with the determinants of lending differing in the corporate and household sectors, the contribution of supply factors generally predominates in corporate lending, but that of demand factors in household lending. By sector, a slowdown in growth of lending to SMEs since the global financial crisis is analyzed as being attributable to a decrease in demand for loans borne of improved profitability and the easing of uncertainties, and to a decline in the contribution of lending capacity (deposits). On the contrary, lending to large corporations have increased due to expanded supply stemming from the ending of certain government support programs for SMEs, as well as to the maintained contribution of lending capacity (deposits).


Meanwhile, mortgage loans had maintained high rates of growth, led by demand factors such as lower lending rates and a rise in housing prices in non-metropolitan areas, since the financial crisis, but then exhibited slower growth with both demand and supply factors weakening in the first half of this year, owing largely to the slump in housing market activity and mounting credit risks. The other household loans have been sluggish due to the weakening of supply factors arising from mounting credit risks.


Based on the analysis of this paper, the following implications can be drawn. First, in the case of mortgage loans, demand factors including housing prices are seen to loom very much larger than supply factors, and this implies that the root cause of the recent sluggish mortgage lending lies in the contraction of the real estate market. In addition, in order to ensure trouble-free credit supply to SMEs and vulnerable groups including those in the lowest-income bracket, there is a need for back-up policies to ease restrictions on supply, such as the expansion of credit guarantee and financial support for those in the lowest-income bracket.


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