Bank Wholesale Funding and Credit Procyclicality: Evidence from Korea

Abstract

Credit procyclicality has recently been the focus of considerable attention, but what fuels the often excessive credit growth is rarely questioned. We investigate the relationship between the composition of banks’ liabilities and their credit procyclicality. After examining the macroeconomic context where banks rely increasingly on wholesale funding (WSF), we estimate the effect of WSF on the banks’ credit growth using quarterly panel data for the commercial banks of Korea from 2000 to 2011. We find that a higher sensitivity of banks’ WSF to the business cycle leads to an excessive response of credit growth to the business cycle, even with a low share of WSF on bank liabilities. On the other hand, we find that overseas WSF has a more marked effect on credit procyclicality, which may additionally exacerbate the financial fragility of export-led emerging economies.

Key words: Credit procyclicality, Wholesale funding, Financial fragility.
JEL: E44, G21, G28.