Three essays on the role of bank lending

Abstract

This paper analyzes the dynamic effects of credit supply on economic growth and the shortand long-term relationship between house prices and income inequality in 18 OECD countries. It was found that increased income inequality expands credit supply in the short term but reduces credit supply in the long term. Increasing house prices contribute positively to greater credit supply and drive economic growth. However, when house prices are higher than long-run equilibrium levels, credit supply can negatively contribute to economic growth. Finally, income inequality has a negative influence on the effect of credit supply on economic growth when it is at a higher phase than the long-run equilibrium level. These results suggest that when an excessive increase in house prices and income inequality occurs, it is necessary to consider the possibility that increasing credit supply may not boost economic growth is necessary.

This paper examines the effect of bank financing on corporate value through the study of KOSPI listed companies from 2003 to 2013. It use the bank loan ratio as a proxy variable for the level of bank monitoring. The analysis results showed that a higher bank loan ratio negatively affected firm value for financially troubled companies with an interest coverage ratio below 1. And for companies with a centralized ownership structure where controlling shareholders have 35% or more shares, a higher bank loan ratio positively affected firm value. This paper also confirmed that bank monitoring effects can differ between firms with high default risk and those with concentrated ownership structure through an event study analysis regarding the impact of the announcement of a unique Korean bank monitoring system of MDG designation on corporate stock price. Negative effects were observed in cases of firms with a high default risk, whereas positive ones in case of firms with concentrated ownership structure. These results of this analysis are generally the same as those which use a bank loan ratio variable.

Korean Savings banks that expanded the number of high-risk loans experienced huge defaults after the 2008 global financial crisis. We consider the prompt corrective action (PCA) to analyze factors that drive savings banks to failure given that an order for PCA by a supervisory authority normally leads to defaults. We conduct discrete choice models to estimate the probability of PCA, using 2005 to 2011 data on 103 Korean savings banks. We find that the post-examination actions taken by supervisory authorities and a rapid increase in loans increase the possibility of PCA. These results suggest that depositors and the market can reduce the costs incurred from defaults by identifying information that predicts PCA.