Various financial regulation effects on the lending market: evidence from Korea

Abstract

This study examined whether changes in loan portfolio composition exist and how such portfolios are constructed when newly introduced macro-prudential instruments, namely risk-weight adjustments and countercyclical capital buffers (CCBs), are incorporated into South Korean housing loans. Burdened by fast-growing household debts, the South Korean Financial Authority (SKFA) implemented a macro-prudential policy. The findings are as follows: First, raising the risk weight for housing loans via the SKFA's policy does not show the evidence that banks make small and medium enterprise (SME) loans increase by cutting their housing loan. Second, incorporating CCBs into housing loans is effective to a limited extent. Third, CCB incorporation is considerably more effective under strong inflationary pressure than it is otherwise. Finally, the policy effects of the new macro-prudential instruments, particularly increasing the risk weight for housing loans, are limited in South Korea.

Keywords:

• Macro-prudential instruments
• inflationary pressure

JEL classifications:

• G2
• G21

Disclosure statement

No potential conflict of interest was reported by the author.

Additional information

Funding

This research was supported by a 2018 research grant over two years from Sangmyung University.