Abstract
This paper investigates the procyclicality of bank loans to Small and Medium Enterprises (SMEs) and to Large Enterprises (LEs) using aggregated and cross-sectional data from major private, foreign, and state-owned banks in Korea in the period from 1999 to 2008. Based on previous studies, it is hypothesized that compared to LEs, banks loans to SMEs may be more vulnerable to external economic shock. Berger and Udell (1994) suggested that bank loans to SMEs are comparatively risky due to their relatively low collateral and heavy dependence on banks for raising funds. In this study, empirical tests are verified by applying the rolling vector error correction Model (VECM), panel generalized least squares model (GLS), and the Clustering Fixed Effect Model. Findings include robust support for the procyclicality of bank loan to SMEs, but not for LEs. The review of short-term dynamics among first differential variables such as loans and GDP provides evidence to support a related hypotheses: the profit-oriented motivation of commercial banks in enhancing relationships with SMEs, the characteristics of governance structure in three types of banks (private, state-owned, and foreign owned banks), and the large-bank barriers assumption.
Highlights
Global financial difficulties caused by the sub-prime mortgage crisis in the latter half of 2008 triggered the current global economic recession
This study primarily examines the relationship between the first differentials of bank loans and business cycles to confirm whether procyclicality exists in bank loans to small and medium Enterprises (SMEs) and Large Enterprises (LEs)
It reviews the dynamics among first differential variables such as ∆GDP, ∆bank loans, and other bank characteristics based on hypotheses related to governance structures, large-bank barriers, and so on
Summary
Global financial difficulties caused by the sub-prime mortgage crisis in the latter half of 2008 triggered the current global economic recession. Financial authorities have asked the banking sector to finance SMEs proactively in an effort to help them resolve their lack of funds. The authorities promoted this action by demonstrating their intention to operate flexibly the standard of financial soundness for banks. The objective of this paper is to explain the relationship between the lending behaviors of banks to SMEs or LEs and business cycle, which is called the hypothesis of procyclicality It argues that bank loans are affected over business cycles. If procyclical of bank loans exists, it is expected to affect struggling Korean SMEs negatively This result could contribute to urging the financial authorities to take steps to alleviate the procyclicality.
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