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Reserve accumulation and bank lending: Evidence from Korea

Youngjin Yun

Journal of International Money and Finance, 2020, vol. 105, issue C

Abstract: Sterilized reserve accumulation reduces room for loans in bank balance sheets by unloading sterilization securities on them, and hence, it may deter loan growth. The effect would be more significant to the banks participating in the primary market for sterilization securities. Using monthly bank-level data for Korea during its massive reserve accumulation period (2003–2008), this paper finds evidence for a crowding-out effect of reserve accumulation. It finds that loan growth rates decline significantly after reserve accumulation, and that the decline is larger in primary dealer banks and foreign bank branches than in non-primary dealer banks and domestic banks, respectively. The results yield the important policy implication that reserve accumulation could work against expansionary effects of capital inflows by mitigating credit expansion and leverage buildup.

Keywords: Foreign exchange reserves; Sterilization; Crowding-out; Bank lending (search for similar items in EconPapers)
JEL-codes: E22 E58 F31 (search for similar items in EconPapers)
Date: 2020
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jimfin:v:105:y:2020:i:c:s0261560618304078

DOI: 10.1016/j.jimonfin.2020.102158

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