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Part of this work was undertaken while Jong-Wha Lee was visiting the IMF’s Research Department and the Center for International Development at Harvard University. The authors are grateful to Andrew Berg, Ajai Chopra, Jason Furman, Jeanne Gobat, Sungwoog Kim, Cheng Hoon Lim, Steve Radelet, Andrew Warner, and seminar participants at the NBER Summer Institute, the Center for International Development, and the Korea-America Economic Association annual meeting for helpful comments on earlier versions of the paper. The views expressed are the authors’ alone and should not be attributed to the organizations that the authors are affiliated with. The authors thank Nada Mora for excellent research assistance and Young Soo Lee for assistance in collecting data.
The term “credit crunch” typically denotes a situation in which an unusual sharp decline in the supply of credit generates an unsatisfied excess demand for credit at the prevailing interest rates. The term has also been used more loosely to describe a situation of tight credit conditions in general. See Ding, Domac, and Ferri (1998) for the various concepts of credit crunch.
A notable exception is a study by Dollar and Hallward-Driemeier (1998) based on a survey of 1200 firms in the Thai manufacturing sector. It is noteworthy that the responses of the Thai firms in this survey, from the third quarter of 1997 to the first quarter of 1998, do not indicate that firms had problems obtaining financing for profitable projects but instead that unfavorable demand conditions led them to demand less credit.
Note that credit rationing, which describes a situation where credit demand exceeds supply and credit is allocated through non-price mechanisms, can occur without a contraction of the supply of credit; that is, there is no necessary connection between credit rationing and a credit crunch.
The call rate, the interest rate on the interbank market, is the commonly monitored indicator of liquidity conditions in the money market.
A detailed analysis of monetary and financial market developments and reforms can be found in Baliño and Ubide (1999).
The behavior of the 12-month growth rate of base money was also affected by the reduction in reserve requirements in 1997.
The financial sector definition in M3 in Korea is very broad, including deposit money banks, specialized banks, development banks, investment institutions and savings and insurance institutions.
Although a part of the increase in total liquidity came from the revaluation of foreign currency deposits, this effect was not significant. The increase in foreign currency deposits accounted for 15 percent of the increase in M3 over the period November 1997 to June 1998.
In other financial crisis episodes, money and credit contracted sharply in real terms. In the case of Mexico, the growth rates of real money and real credit were -12.3 and -19.2 percent respectively in 1995. See Lane et al. (1999).
The bank overdraft lending rate soared to 37.5 percent in December 1997 from 17.1 in November 1997, while the interest rates of general bank loans increased more modestly to 15.3 percent from 12.3 percent over the same month.
See Kashayp and Stein (1994) and Bernanke and Gertler (1995) for surveys of the bank lending view. Monetary tightening can also have an adverse effect on firms by the depressing effect on the firms’ collaterals and internal funds- which is called separately as a “balance sheet channel.”
Bernanke and Lown (1991) show that in the 1990-91 US recession period, banks with low capital ratio had slow lending growth. Peek and Rosengren (1995) show that banks that were targets of formal regulatory actions reduced their lending at a significantly faster rate than those that were not. Hall (1993) finds evidence that the introduction of the BIS risk-based capital standards induced US commercial banks to change the portfolio towards safer assets (e.g. Treasury securities) away from commercial loans, while Berger and Udell (1994) claim the effect of the risk-based capital regulations on lending was not quantitatively important. Ito and Sasaki (1998) confirm the effect of the risk-based capital standards on the lending behavior of Japanese banks in the period between 1990 and 1993.
Borensztein and Lee (1999) provide some empirical evidence of inefficient credit allocations among Korean manufacturing sectors for the period from 1970 to 1996.
Note that this database covers only listed companies which comprised 776 companies as of 1997. Another database compiled by the Korea Investors Service (KIS) contains financial information on much larger number of companies, including both listed and unlisted companies. The financial information on the unlisted firms can be considered as less reliable.
The Korean Fair Trade Commission (KFTC) legally defines a business group as “a group of companies, more than 30 percent of whose shares are owned by some individuals or by companies controlled by those individuals”. The KFTC identifies business groups and announces them every year.
Among the 30 chaebols, the top 5 chaebols, comprising Hyundai, Samsung, Daewoo, LG, and SK, are the most powerful. The top five chaebols alone produced about 9 percent of GDP and accounted for 27 percent of manufacturing GDP in 1995.
In 1996 total number of subsidiaries that belonged to the top 30 chaebols was 669. The listed companies accounted for 26 percent of the total (Yoo, 1998).
The profit rate is defined as the ratio of ordinary income (net profit before income tax plus net extraordinary gains) to total assets.
We have used only the more recent years for the regression in order to maximize the number of firms included in the balanced panel. Since financial data are available for a much smaller number of firms in the earlier years than in the recent period, extending the data set into the earlier period would force many firms to drop out of the sample. The results reported below do not change qualitatively, however, when we use a balanced panel data set over the whole period from 1990 to 1998.
The results do not change qualitatively when we allow for firm-specific fixed effects or when the lagged dependent variable is excluded. The results also do not change when we include dummies for industry (total 24 dummies for 16 manufacturing and 8 non-manufacturing sectors) to control for industry effects.
Ideally, we should test the effect of future profitability, rather than past profit rates, on credit growth. Unfortunately, we do not have an accurate measure of firm’s future profitability such as Tobin’s Q.
A recent study by Choi and Kang (1999) based on survey of 863 Korean firms also finds support for the result that firms belonging to chaebol groups became subject to tougher loan appraisal. The study shows that the proportion of large firms rejected for loans rose sharply from 21 percent in 1997 to 61 percent in the first half of 1998, far exceeding that of small and medium firms.
This regression is in the spirit of Calvo and Coricelli (1992) analysis of the output decline in the economies of Central and Eastern Europe at the outset of the reform process.
The results do not change when we include dummies for industry to control for industry effects.