The Impact of Foreign Bank Deleveraging on Korea

Abstract

Korea was hit hard by the 2008 global financial crisis, with the foreign bank deleveraging channel coming prominently into play. The global financial crisis demonstrated that a sharp deleveraging can be transmitted to emerging markets through the bank lending channel to a slowdown in credit growth. The analysis finds that a sharp decline in external funding led to relatively modest decline in domestic credit by Korean banks, due to concerted policy efforts by the government in 2008. Impulse responses from a Dynamic Stochastic General Equilibrium (DSGE) model calibrated to Korea shows that it appears better prepared to handle such shocks relative to 2008. Indeed, Korea is much more resilient to such shocks due to the efforts by the authorities, which has led to the strengthening of external buffers, such as higher foreign exchange reserves and bilateral and multilateral currency swap arrangements.

Keywords: International banks, Korea, Republic of, Global Financial Crisis 2008-2009, External shocks, Banking sector, Liquidity, Financial crisis, Economic models, Global banks, liquidity shock, cross-border lending, domestic banks, foreign bank, external funding, foreign banks, foreign assets, international settlements, intermediate goods, open economy, investment goods, domestic goods, foreign exchange, imported goods, foreign currency, foreign branches, domestic economy, foreign exchange reserves, foreign asset, return on capital, world economy, net exports, net foreign assets, country of origin, short-term debt, imported good

JEL Classification: G20, E30, E50