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Credit cycle and balancing the capital gap: Evidence from Korea

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  • Song, Joonhyuk
  • Ryu, Doojin

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.

Suggested Citation

  • Song, Joonhyuk & Ryu, Doojin, 2016. "Credit cycle and balancing the capital gap: Evidence from Korea," Economic Systems, Elsevier, vol. 40(4), pages 595-611.
    • Handle: RePEc:eee:ecosys:v:40:y:2016:i:4:p:595-611
    DOI: 10.1016/j.ecosys.2016.02.006
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    Cited by:

    1. Hyeongjun Kim & Hoon Cho & Doojin Ryu, 2018. "Characteristics of Mortgage Terminations: an Analysis of a Loan-Level Dataset," The Journal of Real Estate Finance and Economics, Springer, vol. 57(4), pages 647-676, November.
    2. Dohyun CHUN & Hoon CHO & Doojin RYU, 2018. "Macroeconomic Structural Changes in a Leading Emerging Market: The Effects of the Asian Financial Crisis," Journal for Economic Forecasting, Institute for Economic Forecasting, vol. 0(2), pages 22-42, December.
    3. Chun, Dohyun & Cho, Hoon & Ryu, Doojin, 2020. "Economic indicators and stock market volatility in an emerging economy," Economic Systems, Elsevier, vol. 44(2).
    4. Daehyeon PARK & Doojin RYU, 2021. "Forecasting Stock Market Dynamics using Bidirectional Long Short-Term Memory," Journal for Economic Forecasting, Institute for Economic Forecasting, vol. 0(2), pages 22-34, June.

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    More about this item

    Keywords

    Capital adequacy ratio; Counter-cyclical capital buffer; Credit-to-GDP gap; Korean banks;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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