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The credit channel at work - lessons from the Republic of Korea's financial crisis


  • Ferri, Giovanni
  • Tae Soo Kang


The authors suggest that the credit channel - as a transmitter of monetary and financial shocks - appears to have aggravated the Republic of Korea's economic crisis. They use micro-data gathered at the bank level to better identify this channel of transmission. They find that: 1) Monetary tightening broadens the spread between marginal bank lending rates and corporate commercial paper rates (consistent with hypothesis that bank lending is a transmitter of monetary shocks). 2) Credit limits on overdrafts - arguably a proxy to identify shifts in the loan supply - react negatively to the monetary squeeze. 3) After the stiffening of bank capital adequacy requirements, banks suffering from larger negative capital shocks experience a more marked slowdown in lending and deposit-taking and also raise their loan rates disproportionately. These findings lend support to the hypothesis that autonomous contraction by banks restricts the availability of credit and magnifies the increase in its cost. This phenomenon compounded the Korean crisis by aggravating liquidity constraints for most agents that rely on bank credit as their only external source of funds. Policymakers may want to provide relief - possibly through market-based actions - to the small and medium-sized enterprises (and other businesses) that suffer unduly from such a credit crunch. To reduce obstacles to recovery, they may also want to devise market-based incentives to make bank loans available to healthy firms in sectors (such as exports) on which recovery depends.

Suggested Citation

  • Ferri, Giovanni & Tae Soo Kang, 1999. "The credit channel at work - lessons from the Republic of Korea's financial crisis," Policy Research Working Paper Series 2190, The World Bank.
  • Handle: RePEc:wbk:wbrwps:2190

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    References listed on IDEAS

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    Cited by:

    1. Concetta Chiuri, Maria & Ferri, Giovanni & Majnoni, Giovanni, 2002. "The macroeconomic impact of bank capital requirements in emerging economies: Past evidence to assess the future," Journal of Banking & Finance, Elsevier, vol. 26(5), pages 881-904, May.
    2. Knedlik, Tobias & Ströbel, Johannes, 2006. "The role of banking portfolios in the transmission from currency crises to banking crises - potential effects of Basel II," IWH Discussion Papers 21/2006, Halle Institute for Economic Research (IWH).
    3. Aysun, Uluc & Brady, Ryan & Honig, Adam, 2013. "Financial frictions and the strength of monetary transmission," Journal of International Money and Finance, Elsevier, vol. 32(C), pages 1097-1119.
    4. Verónica Mies M. & Felipe Morandé L. & Matías Tapia G., 2002. "Monetary Policy and Transmission Mechanisms: New Elements for an old Debate," Journal Economía Chilena (The Chilean Economy), Central Bank of Chile, vol. 5(3), pages 29-66, December.
    5. Borensztein, Eduardo & Lee, Jong-Wha, 2002. "Financial crisis and credit crunch in Korea: evidence from firm-level data," Journal of Monetary Economics, Elsevier, vol. 49(4), pages 853-875, May.
    6. Antonio Forte & Giovanni Pesce, 2009. "The International Financial Crisis: an Expert Survey," SERIES 0024, Dipartimento di Economia e Finanza - Università degli Studi di Bari "Aldo Moro", revised Apr 2009.
    7. Sung Jin Kang & Yasuyuki Sawada, 2008. "Credit Crunch And Household Welfare, The Case Of The Korean Financial Crisis," The Japanese Economic Review, Japanese Economic Association, vol. 59(4), pages 438-458.
    8. Yasuyuki Sawada & Sung Jin Kang, 2004. "Credit Crunches and Household Welfare: The Case of Korean Financial Crisis," Econometric Society 2004 Far Eastern Meetings 751, Econometric Society.
    9. Abdul Karim, Mastura & Hassan, M. Kabir & Hassan, Taufiq & Mohamad, Shamsher, 2014. "Capital adequacy and lending and deposit behaviors of conventional and Islamic banks," Pacific-Basin Finance Journal, Elsevier, vol. 28(C), pages 58-75.
    10. Kris James Mitchener, 2004. "Bank Supervision, Regulation, and Instability During the Great Depression," NBER Working Papers 10475, National Bureau of Economic Research, Inc.
    11. Joe Peek & Eric S. Rosengren, 2013. "The role of banks in the transmission of monetary policy," Public Policy Discussion Paper 13-5, Federal Reserve Bank of Boston.


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