The effect of the regulation of the total amount of household loans on lending behavior of Korean banks

This study empirically analyzed the effect of Korea’s regulation of total amount of loans in household sector on bank prices like lending rate, interest business profitability, and loan portfolio decisions. Korea, which is known as a country with tight financial regulations among OECD countries, recently implemented a regulation on the total amount of household debt as a measure in response to the recent surge in household loan demand in the wake of the COVID 19 pandemic. While macro-prudential policy focusing on capital regulation is recognized as a global standard, confirming the effect of tightening household loan supply on changes in lending market is different from previous studies. The main research results and theoretical discussion confirmed in this study are as follows. First, restrictions on the amount of household loans, the possibility of tighter loan supply, and changes in loan regulation stance have led to an increase in lending rates at banks, as suggested by Kim (2019) and Castro et al. (2022). Second, the strengthening of regulations on the total amount of loans has improved the interest profitability of banks. It is presumed that Korean banks with strong market dominance are profitable with high interest margins despite a decrease in loan volume. Third, the effect of the total loan amount regulation on the bank loan portfolio decision was confirmed.