Credit cycle and balancing the capital gap: Evidence from Korea

Joonhyuk Song and Doojin Ryu

Economic Systems, 2016, vol. 40, issue 4, 595-611

Abstract: This paper examines balance sheet adjustments of a banking sector due to credit cycles using data from national and regional banks in South Korea, which is a leading emerging market. Specifically, banks’ target capital ratios are estimated and compared with actual capital ratios to identify capital gaps, and the responses to the gaps are then analyzed using a panel model. The empirical results show that the expansion of the credit-to-GDP gap increases the target capital, hence reducing the capital gap. Additionally, changes in the capital gap impact banks’ asset compositions and managerial behaviors. A decrease in the capital gap lowers the growth rate of total assets, risk-weighted assets, and loan obligations, but increases the growth rate of core capital relative to risky assets by a higher degree than that of the risk-weighted assets itself. Similar results are shown in various cases using other popular indicators as predictor variables for credit cycles.

Keywords: Capital adequacy ratio; Counter-cyclical capital buffer; Credit-to-GDP gap; Korean banks (search for similar items in EconPapers)
JEL-codes: G10 G21 G28 (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (6)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecosys:v:40:y:2016:i:4:p:595-611

DOI: 10.1016/j.ecosys.2016.02.006

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