Premium
The Credit Channel at Work: Lessons from the Financial Crisis in Korea
Author(s) -
Ferri Giovanni,
Kang Tae Soo
Publication year - 1999
Publication title -
economic notes
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.274
H-Index - 19
eISSN - 1468-0300
pISSN - 0391-5026
DOI - 10.1111/1468-0300.00010
Subject(s) - retrenchment , loan , market liquidity , monetary economics , overdraft , economics , financial crisis , credit channel , business , financial system , interest rate , monetary policy , finance , inflation targeting , macroeconomics , public administration , political science
We demonstrate that the credit channel of transmission of monetary/financial shocks appears to have aggravated Korea's economic crisis. We use micro‐data gathered at the individual bank level to identify this channel of transmission. Our major findings are as follows: i) consistent with banks' autonomous retrenchment in loan supply, monetary tightening broadens the spread between marginal bank lending rates and corporate commercial paper rates; ii) credit limits on overdrafts – arguably a proxy identifying shifts in loan supply – react negatively to the monetary squeeze; iii) large negative capital shocks induce banks to disproportionately slow‐down both lending and deposit taking and to disproportionately raise their lending rates. Our findings lend unequivocal support to the hypothesis that banks' autonomous contraction restricted the availability of credit and magnified the increase in its cost. In turn, this compounded the Korean crisis by aggravating liquidity constraints for the vast majority of agents who rely only on bank credit as an external source of funds.