• Management & Information Systems Review
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• v.36 no.4
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• pp.53-80
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• 2017

The purpose of this study is to examine the determinants of the number of bank relationships in Korea. Firm-specific determinants considered here include leverage, size, age, return on asset, investment grade, tangibility, liquidity, R&D expenditure. We estimate the effects of these variables, and compare the results with those from previous studies performed for other economies. Concerning the effects of business cycle, we find that the business cycle is an important factor in determining the number of bank relationships. The number of bank relationships varies over the business cycle, and we notice a counter-cyclical behavior, which means the number decreases during economic expansions and increases during contractions. This result can be interpreted as a result of firms' diversification of borrowings into multiple banks in order to reduce the liquidity risk during the recession. In the subsets, however, the number of bank relationships for large firms is stable regardless of the business cycle. Unlisted firms, non-chaebol, and low credit quality firms which have relatively limited access to alternative sources of financing show counter-cyclical behavior. Finally, such phenomena is not observed in the non-competitive credit market, while they show a counter-cyclical behavior in the competitive credit market.

• KDI Journal of Economic Policy
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• v.28 no.2
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• pp.97-129
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• 2006

This study investigates whether dynamic loan loss provisioning is necessary in Korean banking environments. Under the dynamic provisioning rule banks are required to accumulate additional reserves to general and specific provisionings in preparation for expected loan losses until maturity. This provisioning is most effective in the case that banks tend to recognize less loan losses in the business upturns and/or in the periods of increasing profits. The empirical study, however, shows that banks support procyclicality of loan loss privisioning and earning smoothing behavior over profit fluctuations. These findings suggest that Korea would not seriously need the introduction of dynamic loan loss provisioning. But this policy implication does not seem robust in view that the recent experience shows the countercyclicality of loan loss provisioning practices and negative correlation between earnings and provisioning after financial restructuring was completed. This result is partly attributable to vigorous shareholder activism because of high foreign ownership of most commercial banks. Once it is true that bank management is more interested in short-term performances, current loan loss provisioning would have attributes of impairing capital adequacy, hence strengthening loan loss provisiong requirements.